Five Star Bancorp Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 31, 2023

Key Takeaways

  • During Q3, 5 Star expanded into the Bay Area with a new team, driving non-broker deposit growth of $137.5 million and net deposit inflows that outpaced loan growth.
  • Loans held for investment rose by $82.5 million (2.82%) driven by $134.6 million in CRE originations, though management anticipates a modest slowdown in loan production in Q4.
  • Asset quality remains strong with non-performing assets at 0.07% of the portfolio, an allowance for credit losses of $34 million (1.13% of loans), and a $1.1 million provision in the quarter.
  • Net interest margin compressed to 3.31% from 3.45% as deposit costs rose to 2.18% on average, with NIM expected to remain under pressure in Q4 around 3.25%–3.30%.
  • Capital ratios stayed well above regulatory thresholds with CET1 up to 9.07%, and the Board declared a $0.20 per share quarterly dividend to be paid in November.
AI Generated. May Contain Errors.
Earnings Conference Call
Five Star Bancorp Q3 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Welcome to the 5 Star Bancorp 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 in number to ask questions. 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 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.

Operator

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 ks for the year ended December 31, 2022, and quarterly report on Form 10 Q for the quarter ended June 30, 2023, and 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 and non GAAP financial information included in this presentation. Reconciliations of non GAAP financial measures to their most directly comparable GAAP measures are included in the appendix to the presentation. Please note this event is being recorded.

Operator

I would now like to turn the presentation over to James Beckwith, 5 Star Bancorp's President and CEO. Please go ahead.

Speaker 1

Thank you for joining us to review 5 Star Bancorp's financial results for the Q3 of 2023. Joining me today is Heather Luck, Senior Vice President and Chief Financial Officer. Our comments today will refer to the financial information that that was included in the earnings announcement released yesterday. To obtain a copy of the release, please visit our Web site@5starbank.com and click on the Investor Relations tab. During the 3 months ended September 30, We enhanced our expansion into the Bay Area market with an addition of another seasoned team of professionals.

Speaker 1

Our organic growth story also continued in the Q3 with the addition of new deposit accounts and relationships as seen in the growth of non broker deposits of $137,500,000 in the 3 months ended September 30, 2023. Despite expected headwinds on the horizon, Our ability to conservatively underwrite, as evidenced by a 51% LTV on commercial real estate, Manage expenses with our 42 percent efficiency ratio and deliver value to shareholders with our $0.20 per share dividend. We believe we are well positioned to continue to endure and succeed as conditions change. In the company overview section, we have provided a brief overview of our geographic footprint and executive In the Q3 of 2023, exhibited Continued execution of our growth strategy, as evidenced by our earnings, expense management and balance sheet trends during the quarter. Additionally, loans, deposits and total assets have consistently grown since the prior periods.

Speaker 1

Our pipeline continues to remain solid at the end of the Q3 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 $82,500,000 or 2.82 percent from the prior quarter, primarily within the commercial real estate Loan originations during the quarter were approximately $134,600,000 while payoffs and pay downs were $52,100,000 Asset quality continues to remain strong. Though non performing 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 3rd quarter, the allowance for credit Losses totaled $34,000,000 We recorded a $1,100,000 provision for credit losses during the quarter, primarily related to loan growth, loan type mix and updates to the macro environment.

Speaker 1

The ratio of the allowance for credit losses to total loans held for investment was 1.13% at quarter end. Loans designated as substandard totaled approximately $2,000,000 at the end of the quarter, which was an increase from $300,000 at 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 Q3, deposits increased $102,500,000 or 3.5 percent as compared to the previous quarter. Non interest bearing deposits as a percent of total deposits at the end of the 3rd quarter decreased slightly to $27,500,000 from 28.4% at the end of the previous quarter.

Speaker 1

To offer more detail on our deposit composition, I want to highlight that deposit relationships totaling at least $5,000,000 constitute approximately 62% of our total deposits, and the average age on these accounts was approximately 9 years. Local agency depositors accounted for approximately 25% of deposits as of September 30, 2023. As noted earlier, we are pleased we have Net deposit inflows for the 1st 3 months excuse me, for the 3 months ended September 30, 2023, 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.

Speaker 1

Non broker deposits increased by $137,500,000 Interest bearing deposits increased by $101,700,000 and non interest bearing deposits increased by $800,000 Total cost of deposits was 218 basis points during the Q3. We continue to be well capitalized With all capital ratios well above regulatory thresholds for the quarter, our common equity Tier 1 ratio increased from 9.05 percent to 9.07 percent between June 30, 2023 and September 30, 2023. On Friday, October 20, we announced a declaration by our Board a cash dividend of $0.20 per share on the company's voting common stock expected to be paid on November 13, 2023 to shareholders of record as of November 6, 2023. On that note, I will hand it over to Heather to discuss the results of operations. Heather?

Speaker 2

Thank you, James, and hello, everyone. Net income for the quarter was $11,000,000 return on average assets was 1.3% and return on average equity was 16.09%. Average loan yield for the quarter was 5.57%, representing an increase of 7 basis points over the prior quarter as rate increases continued with the 4th increase this year taking place in July. Our net interest margin was 3.31 percent for the quarter, while net interest margin for the prior quarter was 3.45%. The most recent Fed rate increase continues to put pressure on deposit costs.

Speaker 2

As a result of changes in interest rates and other factors, our other comprehensive loss was $3,000,000 during the 3 months ended September 30, 2023, as unrealized losses, net of tax effect, increased on available for sale of debt securities from $12,900,000 as of June 30 to $15,900,000 as of September 30, 2023. Non interest income decreased to $1,400,000 in the 3rd quarter from $2,800,000 in the previous quarter, due primarily to a $1,300,000 gain in other income recognized on distributions received on investments in venture backed funds during the 3 months ended June 30. Non interest expense grew by $36,000 in the 3 months ended September 30 as compared to the 3 months ended June 30, primarily due to a $500,000 increase in salaries and employee benefits, which was partially offset by decreases of Now that we've discussed the overall results of operations, I will now hand it back to James to provide some closing remarks.

Speaker 1

Thank you, Heather. I want to thank everyone for joining us as we discuss 3rd quarter results. 5 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 5 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.

Speaker 1

We are very proud to earn the trust of those we serve, including our shareholders. In the Q3, our efforts were recognized as we were listed among Piper Sandler's SM All Stars for 2023 as a top performing small cap bank acknowledged for Outperformance in several metrics, including growth, profitability, asset quality and capital. We were also listed among Sacramento Business Journal's Best Places to Work. Looking to the remainder of 2023, We will be 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.

Speaker 1

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.

Operator

We will now begin the question and answer session. Questions will be taken in the order received. The first question today comes from Gary Tenner with D. A. Davidson.

Operator

Please go ahead.

Speaker 3

Thanks. Good morning. Good morning, Gary. I wanted to ask about the loan growth this Quarter, the commercial real estate growth looked pretty concentrated between manufactured home community, RV park and multifamily. So Just wondering what you could tell us about kind of the ongoing demand, particularly in those loan areas?

Speaker 3

And maybe what The new loans coming on board right now, what they look like from a kind of debt service coverage, LTV, any kind of underlying metrics around

Speaker 1

Sure. Well, Gary, things have slowed. We expect To see that in the Q4 and probably well into the Q1, given where cap rates are and interest rates are generally speaking. Our 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 and in state credit, so it's been very consistent.

Speaker 1

We continue to focus on manufactured Home Communities and RV Parks, and we expect to see same or similar in the Q4. But we are starting to grow our So we're 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 up here in the Sacramento in the capital region, if you will. So nothing's really changed from an underwriting perspective. I think you can see in the deck what our LTVs are, And we're very much cash flow lenders.

Speaker 1

So we always like to have a very nice cash flow. I think $135,000,000 is at origination in terms of our mobile home park book of business, but we've been very consistent over the years.

Speaker 3

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, if you could provide that for us either interest bearing or total Deposits?

Speaker 2

Yes. Total spot rate was 2.24.

Speaker 3

Okay. And the average was 2.18. So was there a Kind of notable slowdown in the pace of change over the course of Q3?

Speaker 1

Yes, very much so. There's still pressure, but I think that the pace of change has slowed. We're very a lot of our customers given that we have such a big book In our local agency, our very rate sensitive. And so, it's really depending upon what Fed does, We could see some reaction there, but the pace of change has slowed.

Speaker 3

Thanks very much.

Operator

The next question comes from Andrew Terrell with Stephens. Please go ahead.

Speaker 4

Hey, good morning.

Speaker 5

Hey, good morning, Andrew.

Speaker 1

Good morning.

Speaker 5

I I

Speaker 4

wanted to ask about some of the recent expansion of the Bay Area. It looked like the teams there did or the team there did $29,000,000 of deposits in the Q3 or so obviously kind of hitting the ground running. I was just curious, were those mostly non interest bearing deposits? I know there's a more C and I oriented focus there. So were they mostly NIBs or was it across the board?

Speaker 4

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 both deposits and for loans?

Speaker 1

Sure. Right now, as we sit here today, I think we've got about $38,000,000 in deposits from Our Bay Area folks, San Francisco folks, I think that that's equally split between non interest 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 mush those together, we're looking anywhere depending upon the relationship of those balances, anywhere between 2% to 2.5% So we expect that to be same or similar. From a lending perspective, I think we've got $5,000,000 of credit booked so far.

Speaker 1

A lot of it is C and I. There's some CRE, but most of it is lines of credit. As we move forward, we expect same and similar in terms of credit, mostly C and I, but having some smattering of CRE in there. And that really is, how owner occupied, whereas a distribution company has got a warehouse that And their liquidity. So it's an all in relationship.

Speaker 4

Yes, 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 $135,000,000 of originations. Would your expectation be that origination levels moderate from that $135,000,000 into the Q4.

Speaker 4

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

Speaker 1

Sure. We're seeing slowdown in loan production given market conditions. So I don't expect it will originate that level in Q4. I would say, probably as we sit here today, We probably are going to do probably something $10,000,000 to $20,000,000 less than that. We do expect some payoffs.

Speaker 1

So our net loan growth in 4th quarter will probably be no better than it was in the 3rd quarter. I think that's probably a safe statement. From a depository perspective, we've got a pretty substantial Pipeline, probably more so than we've had in the last 6 to 9 months. We've had 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.

Speaker 1

And We do expect our deposit growth to exceed our loan growth in the Q4. I think you could see that we did that marginally in the Q3 and we expect same or similar results in the Q4, but at reduced levels, certainly on the loan side, maybe not so much on the deposit side, but certainly on the loan side.

Speaker 2

And as we look through to 2024 also, I know we've given this guidance before, but We are still looking at 10% loan growth, 8% deposit growth sorry, flip that, 10% deposit growth, 8% loan growth for the forecast period.

Speaker 1

I think we're pretty much right on top of that year to date, maybe a little lower on deposits, but right about that on loans, but certainly deposit growth has exceeded loan growth.

Speaker 4

Yes. I appreciate it. And the last one for me, the $135,000,000 of originations made this quarter, do you have what the weighted average Yield was for new originations?

Speaker 2

Yes. That was 7.70%.

Speaker 4

7.70%. Got it. Okay. I'll step back in the queue. Thanks for taking the questions.

Speaker 1

Thank you, Andrew.

Operator

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

Speaker 3

Hey, thanks for the follow-up. Heather, I just want to clarify the comment you just made on the loan Deposit growth, that was relative to 2023?

Speaker 2

Correct. So annual

Speaker 3

Correct. Any kind of early Thoughts on the kind of similar metrics and outlook for 2024?

Speaker 2

Yes. Similar thing, 10% deposits, for 8% loans.

Speaker 3

Okay, perfect. Thank you.

Speaker 4

Yes.

Operator

The next question comes from Andrew Terrell with Stephens. Please go ahead.

Speaker 4

Hey, thanks for the follow-up. Heather, I wanted to get an idea. I mean, so you guys have certainly done a good job in hiring this year. But when I look at The expense run rate has also been, I'd call it, pretty well contained. I wanted to get your thoughts on maybe the expense run rate heading into the 4th And then any preliminary thoughts on expense growth in 2024?

Speaker 2

So for and thank you for 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 $500,000 to the non interest That should give you a pretty good estimate. We did hire new people in the Bay. We'll continue to add more people.

Speaker 2

But we also do have some one time events that happened in Q4. So I think about $500,000 can get you there for the rest of the year.

Speaker 5

And then I think you

Speaker 2

could probably use that as a proxy for the 1st 2 quarters of next year.

Speaker 4

Okay. So around a $12,500,000 quarter level feels good?

Speaker 5

Yes. I think that's a

Speaker 2

pretty good estimate for now for the next three quarters.

Speaker 4

Okay, perfect. And then maybe one more for James, just to that point on hiring and the teams that you've added. I mean, certainly, 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 continue building out the Bay Area or do you feel like you have What you need there in place already today?

Speaker 4

And then anywhere else across your footprint where you're seeing market opportunity? And what's your kind of appetite to incrementally hire from here?

Speaker 1

Well, we think we have a little ways to go in the Bay Area, Andrew, we're targeting probably 4 to 5 more people. When they come on, they may come on in January. And 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 in the surrounds. 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've we're starting those dialogues.

Speaker 1

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. Right now, we have 9 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's a cycle that occurs down there given all the turmoil, if you will, various stagings for Well, I'm going to say stay bonuses and whatnot that we're sensitive to, that you have to kind of take into account and comprehend.

Speaker 1

So I think that that is 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're expensive, but they're of high quality.

Speaker 4

Yes. Very good. Appreciate the color. If I could sneak one more in just on the margin, Heather, I appreciate the commentary on the spot rate and it does look like the Deposit costs really kind of slowed into quarter end. I guess, when you pair that with the other side of the balance sheet, does it feel like the margin is At a point of inflection heading into the Q4, would you expect maybe some further compression in 4Q or early into 1Q?

Speaker 2

Yes. We will see some compression. There's definitely some pressure. We're targeting right now to be between 3.20 5 and 3.30 on our NIMs. And I think that's a pretty good assumption for Q4 and Q1.

Speaker 4

Yes. Okay. So relatively stable to 3Q levels, maybe off a few basis points or so?

Operator

That's correct.

Speaker 4

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

Operator

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

Speaker 1

Great. Thank you. 5 Star Bancorp is on a continued path of growth as we execute on strategic initiatives, which includes 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 Sacramento Business Journal. We are also pleased the company maintains a Bauer Financial superior rating of 5 out of 5 stars and an IDCE superior rating.

Speaker 1

The company is also a super 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 4th

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