Earnings call: Five Star Bancorp reports Q1 financials, plans expansion

Five Star Bancorp (FSBC) has released its financial results for the first quarter of 2024, revealing a robust net income of $10.6 million and a commitment to expansion, especially in the San Francisco Bay Area market. The bank announced an underwritten public offering of 3.45 million shares of common stock aimed at fueling its growth and general corporate purposes. The quarter also saw a significant increase in non-wholesale deposits and a maintained dividend payout to shareholders.

Key Takeaways

• Five Star Bancorp posted a net income of $10.6 million for Q1 2024.
• The bank announced a public offering of 3.45 million shares for corporate growth.
• Non-wholesale deposits increased by $112 million.
• Dividends were sustained at $0.20 per share.
• Conservative underwriting and strong asset quality with non-performing loans at just 0.06% of the portfolio.
• Deposit growth of 10% is expected for the year, with a strategic reduction in reliance on wholesale deposits.

Company Outlook

• Five Star Bancorp is well-capitalized, exceeding regulatory capital ratios.
• Anticipates a 10% growth in deposits for 2024, including the runoff of wholesale deposits.
• Plans to increase expenses by $500,000 in Q2, largely due to hiring and increased advertising.

Bearish Highlights

• Deposits saw an overall decrease due to a strategic shift away from wholesale deposits.

Bullish Highlights

• Loan growth occurred in the quarter.
• Non-interest-bearing deposits made up 27.7% of total deposits.
• Large deposit relationships, constituting 58% of total deposits, show strong customer trust.

Misses

• No significant misses were reported in the earnings call.

Q&A Highlights

• Management clarified that they do not foresee a significant runoff of wholesale deposits for the remainder of the year.
• The company’s net interest margin stood at 3.18% for March.
• Recognized for various awards, Five Star Bancorp emphasized its role in economic development and community advocacy.

In the first quarter, Five Star Bancorp demonstrated a disciplined approach to growth and profitability. The company’s conservative underwriting and expense management, paired with its strategic focus on non-wholesale deposit growth and customer acquisition, positioned it well in the competitive banking landscape. With a strong start to the year and clear growth strategies in place, Five Star Bancorp is poised for continued success in the quarters to come. The next earnings call is anticipated in July, where the company will provide updates on its second-quarter performance.

InvestingPro Insights

Five Star Bancorp (FSBC) has shown a solid performance in the first quarter of 2024, which is also reflected in some key financial metrics. The company’s market capitalization stands at a healthy $460.96 million, and it boasts a price-to-earnings (P/E) ratio of 8.21, indicating that the stock may be reasonably valued relative to its earnings. This P/E ratio is particularly interesting when considering the company’s announcement of an underwritten public offering, which could potentially dilute earnings per share but also provide capital for further expansion.

Investors may also be pleased to note the company’s dividend yield of 3.7%, especially since Five Star Bancorp has raised its dividend for 3 consecutive years, showing a commitment to returning value to shareholders. This is particularly relevant in light of the maintained dividend payout mentioned in the article. The dividend growth over the last twelve months as of Q1 2024 is notably strong at 33.33%.

On the other side, there are some concerns to consider. The company suffers from weak gross profit margins, which could be a point of focus for investors who prioritize profitability and efficiency. Additionally, three analysts have revised their earnings downwards for the upcoming period, suggesting that there may be challenges ahead that could affect the company’s bottom line.

For those looking to delve deeper into Five Star Bancorp’s financial health and future prospects, InvestingPro offers a wealth of additional insights. There are numerous other InvestingPro Tips available, which can provide a more comprehensive understanding of the company’s performance and potential. To explore these tips, you can visit and don’t forget to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.

Full transcript – Five Star Bancorp (FSBC) Q1 2024:

Operator: Welcome to the Five Star Bancorp First Quarter Earnings Webcast. Please note this is a closed conference call, and you are encouraged to listen via the webcast. [Operator Instructions]. 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. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from the company’s forward-looking statements, please see the company’s annual report on Form 10-K for the year ended December 31, 2023, and in particular, the information set forth in Item 1A Risk Factors. 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 figures are included in the appendix to the presentation. Please note this event is being recorded. I would now like to turn the presentation over to James Beckwith, Five Star Bancorp’s President and CEO. Please go ahead.

James Beckwith: Thank you for joining us to review Five Star Bancorp’s financial results for the first quarter of 2024. Joining me today is Heather Luck, Senior Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings 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 first quarter with the announcement of our underwritten public offering of 3.45 million shares of the bank’s common stock and underwriter’s option to purchase up to an additional 517,500 shares, with the intention of using the net proceeds for general corporate purposes to support our continued growth and for working capital. We also added five more seasoned professionals to support our expansion in the San Francisco Bay Area market and continue to add new core deposit accounts and relationships as seen in the increase of non-wholesale deposits of $112 million in the three months ended March 31, 2024. Despite continued external headwinds, we maintained our ability to conservatively underwrite as evidenced by a 50% LTV on commercial real estate, manage expenses with our 45% efficiency ratio, and deliver value to our shareholders with our $0.20 per share dividends for the fourth quarter of 2023 and the first quarter of 2024. The first quarter of 2024 exhibited continued margin compression. Although slowing compared to prior quarters, we remain focused on the execution of our organic growth strategy, and we’re able to maintain earnings and expense management trends during the quarter. Loans have consistently grown since prior periods. The decrease in deposits and total assets during the quarter is the result of relying less on wholesale deposits and short-term borrowings, which positions us well for future growth. Our pipeline continues to remain solid at the end of the first quarter of 2024 within verticals we have historically operated in as presented in the loan portfolio diversification slide. Loans held for investment increased during the quarter by $22.4 million or 0.73% from the prior quarter, primarily within the consumer concentration of the loan portfolio. Loan originations during the quarter for approximately $149.9 million, while payoffs and paydowns were $77.2 million and $50.3 million, respectively. Asset quality continues to remain strong. The non-performing loans increased beginning in the third quarter of 2023. They continued to represent only 0.06% of the portfolio at the end of the first quarter. At the end of the first quarter, the allowance for credit losses totaled $34.7 million. We recorded a $0.9 million provision for credit losses during the quarter, primarily related to the net effect of charge-offs, increases and qualitative reserves, and reduction in reserves for qualitative factors. The ratio of the allowance for credit losses to total loans held for investment was 1.12% at quarter end. Loans designated as substandard totaled approximately $1.9 million at the end of the quarter, which was a decrease from the $2.0 million at the end of the previous quarter. During the first quarter, deposits decreased by $71.1 million or 2.35% as compared to the previous quarter. Non-interest-bearing deposits as a percentage of total deposits at the end of the first quarter increased slightly to 27.7% from 27.5% at the end of the previous quarter. As noted earlier, we are pleased we had a net non-wholesale deposit inflows for the three months ended March 31, 2024. Our ability to grow deposit accounts supports our differentiated customer-centric model that our customers trust and value has seen through the mix of high dollar accounts and the duration of certain customer relations. We believe we have a reliable core deposit base. To offer more detail on our deposit composition, I want to highlight that deposit relationships totaling at least $5 million constituted approximately 58% of total deposits. And the average age of these accounts was approximately nine years. Local agency depositors accounted for approximately 24% of deposits as of March 31, 2024. Overall deposit balances have decreased when compared to the prior quarter as a result of our focus to rely less on costly wholesale deposits. Wholesale deposits, which we defined as broker deposits and public time deposits, decreased by $183.1 million. Non-wholesale deposits increased by $112 million, driven by a $125.7 million increase in interest-bearing deposits, partially offset by a $13.7 million decrease in non-interest-bearing deposits. Cost of total deposits was 253 basis points during the fourth quarter. We continue to be well capitalized with all capital ratios well above regulatory thresholds for the quarter. Our common equity Tier 1 ratio increase from 9.07% to 9.13% between December 31, 2023 and March 31, 2024. On April 19, we announced the declaration by our Board of Directors a cash dividend of $0.20 per share on the company’s voting common stock, expected to be paid on May 13, 2024, to shareholders of record as of May 6, 2024. On that note, I will hand it over to Heather to discuss the results of operations. Heather?

Heather Luck: Thank you, James, and hello, everyone. Net income for the quarter was $10.6 million. Return on average assets was 1.22% and return on average equity was 14.84%. Average loan yield for the quarter was 5.71%, representing an increase of 7 basis points over the prior quarter. Our net interest margin was 3.14% for the quarter, while net interest margin for the prior quarter was 3.19%. Fed rate increases in 2023 continue to put pressure on deposit costs. As a result of changes in interest rates and other factors, our other comprehensive loss was $0.7 million during the three months ended March 31, 2024, as unrealized losses, net of tax effect increased on available for sale debt securities from $11.8 million as of December 31, 2023 to $12.4 million as of March 31, 2024. Non-interest income decreased to $1.8 million in the first quarter from $1.9 million in the previous quarter, due primarily to reductions in gains from distributions on investments in venture backed funds and the recognition of rate lock and swap referral fees during the three months ended March 31, 2024. The decreases were partially offset by reduction in net losses on the sale of securities, which did not occur in the first quarter of 2024. Non-interest expense grew by $53,000 in the three months ended March 31, 2024 compared to the three months ended December 31, 2023. This is primarily due to an increase in salaries and employee benefits, partially offset by declines in advertising and preferred promotional expenses as well as other operating expenses during the quarter. Now that we have discussed the overall results of operations, I will now hand it back to James to provide some closing remarks.

James Beckwith: Thank you, Heather. I want to thank everyone for joining us as we discuss first-quarter results. Five Star Bank has a reputation built on trust, speed to serve, and certainty of execution, which support our clients’ success, our financial performance to 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. We are very proud to have earned the trust of those we serve, including our shareholders. As we lean into 2024, we are guided by 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 disciplined business practices, which we believe will benefit our customers, employees, community, and shareholders. We appreciate your time today. This concludes today’s presentation. Now Heather and I will be happy to take any questions that you might have.

Operator: [Operator Instructions]. The first question today comes from Andrew Terrell with Stephens.

Andrew Terrell:

James Beckwith: Just a couple on deposits for me. When did the runoff in the brokered deposits and then public fund time deposits occurred during the quarter another? Do you have the weighted average cost of those deposits?

Heather Luck: So going into the first quarter for the year, we had a weighted average rate of about 5.26% on the wholesale deposits, and that had a balance of about $360 million. We really did, I would say, by the second half of the quarter, when most of the urban wholesale deposits runoff. So now we’re currently sitting at a weighted average rate of 5.12% and then a total balance of $177 million.

Andrew Terrell: Yeah. I mean, can you talk about your — I mean, the remix this quarter was obviously very impressive. You’ve got some like 177 last of wholesale. Can you just remind us of the deposit growth expectations for the year? And then would you expect any more runoff in the wholesale deposits within that deposit guidance?

James Beckwith: Sure. We’re going to stick to our 10% of deposit growth. We plan to end up in that 10%, That includes accounting for the runoff of the Q1 runoff of wholesale deposits. I think as we sit right now, I wouldn’t expect too great of a continued runoff of wholesale. We’ll probably be pretty static, Andrew, for the rest of the year, but we’ll look at this on a quarter-by-quarter basis. We like where we are. In a certain respect, maintaining relationships, particularly with the State of California is important. So I would think that we have a small, brokered piece left in July.

Heather Luck: $42 million.

James Beckwith: $42 million which, hopefully, we’ll be able to eliminate that. But nothing probably greater than that, Andrew.

Andrew Terrell: Okay, great. I appreciate it. And then could you maybe just compare and contrast the non-wholesale deposit growth? I think it was $112 million or so this quarter. Just the weighted average cost, you’re bringing new money on the balance sheet today versus what we saw roll-off in the first quarter.

James Beckwith: Sure. A lot of the balances that we’re bringing on right now are interest bearing. And when I think about — if I was to amalgamate what we expect in terms of non-interest bearing and interest bearing, that weighted average rate is probably around a little shy of 3%. But the interest-bearing stuff is — probably has about a 4% handle on it. Yes, I’m thinking all this through. And so we’re successful in our — for the remainder of the year, like with non-interest-bearing deposit increases. And that’s really driven by new relationships that we’re bringing on. That will work those numbers down. I think our San Francisco effort in terms of yield that we’re paying those deposit customers — Heather, do you have that information because I’m going to hold off the top of my head?

Heather Luck: I want to say it’s close to 3%.

James Beckwith: Yes, it’s a little shy of 3%. To , I think that was in deck.

Heather Luck: Correct.

James Beckwith: So that’s what we’re looking at right now in terms of what we’re bringing to these new relationships on.

Unidentified Company Representative: And Andrew, it’s important to note, as we bank these new customers across our entire footprint, we’re really after their operating accounts and their liquidity. So we look at things in totality in terms of cost of funds. So if we can pay somebody 4% for their liquidity and just bank their non-op, their transactional account, if you will, we think that that’s a winning strategy. Hopefully, we can deliver the entire relationships up 3%.

Andrew Terrell: Yeah, I totally appreciate that. Understood. If I can ask just one last one other on the margin, do you have the margin in the month of March?

Heather Luck: Oh, in the month of March? I do. So our net interest margin for — let me pull up that piece of it. Net interest margin for the month of March was about 3.18%. Operator [Operator Instructions] The next question comes from Gary Tenner with D.A. Davidson.

Gary Tenner: Thanks. Good morning. I wanted to ask on the expense side. What the near-term thinking is on expense level, just kind of fully loaded for new hires?

Heather Luck: Yeah. So I think if we look at for Q2, I think if we add about $500,000 for Q2’s expenses to what we incurred for Q1, that should put your model in good shape there. We do have some new hires, but then also some expenses for conferences that we have running through that are a little bigger than Q1.

James Beckwith: And our advertising spend is going to go up in the second quarter, third quarter, fourth quarter as we continue to develop the Bay Area.

Gary Tenner: I appreciate it. And then I may have missed this answer, secondly, I heard you mentioned I think the March NIM, Heather. But did you provide the spot rates as of March 31? If you did, I apologize for missing it.

Heather Luck: No, sure. Spot rate for cost of deposits was.

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

James Beckwith: Great. Thank you. 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 success we share with our shareholders, employees. These successes include numerous rating and awards. In the first quarter, the company’s leadership was recognized by the Sacramento Business Journal on the Power 100 List and the Women Who Mean Business List. Company leadership also received the National Association of Women Business Owners’ Outstanding Women Leaders’ Executive Women Award. Also, in the first quarter, two of our customers were recognized by the Sacramento Small Business Administration in the categories of Family-Owned Small Business of the Year and Minority Small Business Champion. Five Star Bank continued continues to be a 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 July to discuss earnings for the second quarter of 2024. Have a great day, and thank you for listening.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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