Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Successful close of public offering resulting in issuance of 3,967,500 additional shares of common stock with net proceeds of approximately $80.9 million.
- Increase in non-wholesale deposits by $118.3 million during the three months ended June 30th, 2024.
- Maintained a conservative underwriting approach with a 50% loan to value on commercial real estate.
- Reported a $0.2 per share dividend for the first and second quarters of 2024.
- Net income for the quarter was $10.8 million, with a return on average assets of 1.23% and return on average equity of 11.72%.
Negative Points
- Nonperforming loans increased at the beginning of the third quarter of 2023, though they represented only 0.06% of the portfolio at the end of the quarter.
- Non-interest income decreased to $1.6 million in the second quarter from $1.8 million in the previous quarter.
- Non-interest bearing deposits as a percent of total deposits decreased slightly from 27.7% to 26.2% at the end of the second quarter.
- Noninterest expense grew by $0.8 million in the three months ended June 30th compared to the three months ended March 31st.
- SBA gain on sale income is not expected to be durable, with expectations of gains significantly less in Q3 and Q4 compared to the first half of the year.
Q & A Highlights
Five Star Bancorp (FSBC, Financial) Q2 2024 Earnings Call Highlights
Q: Can you talk about the consumer loan purchase in the quarter, specifically the type of loans, their yield, and credit profile? Also, what is the strategy behind this purchase considering the recent capital raise?
A: These loans were originated by Bankers Health Group (BHG) and have a strong credit profile with an average yield of 8.25%. They are loans to professional individuals across the U.S. We've had a favorable credit experience with BHG over several years. This purchase is additive to our portfolio and comes at a good margin, but we do not plan to rely on it for overall growth. (James Samford, President & CEO)
Q: Was the loan purchase made at a specific time during the quarter? How will this affect loan yields in Q3?
A: The purchase was made in the latter half of the quarter, so its impact will carry forward into Q3. Other factors also contributed to the increase in loan yields, such as higher rates on new loans and paydowns of lower-rate loans. (James Samford, President & CEO)
Q: The SBA gain on sale income increased this quarter. Is this increase sustainable?
A: We do not expect the increase to be sustainable. We have reduced the importance of this business and will not be originating at previous levels. Gains on sales will likely diminish in the coming quarters. (James Samford, President & CEO)
Q: There was a quarter-over-quarter increase in expenses. What is the expected expense run rate for the rest of the year?
A: The increase was due to more events and conferences in Q2. For the rest of the year, expect an additional $250,000 per quarter in expenses. We have some significant events planned, including the grand opening of our San Francisco branch. (Heather Lowe, CFO)
Q: Can you discuss your target comfort level for wholesale funding percentage and the loan-to-deposit ratio?
A: We will continue to use wholesale deposits as a funding source, especially as rates decline. Historically, we've operated with a loan-to-deposit ratio below 100%, targeting around 95%. We could achieve this ratio quickly if needed but are focusing on growing core deposits. (James Samford, President & CEO)
Q: Can you elaborate on the deposit growth in the Bay Area and expectations for the rest of the year?
A: We expect similar or higher growth in Q3 and Q4. We've added significant talent and are seeing strong traction, especially with the recent conversion issues at JPM Chase. Our grand opening in San Francisco is scheduled for late September, and we are optimistic about continued growth. (James Samford, President & CEO)
Q: What are the loan growth trends in the Bay Area?
A: We have total loan commitments of around $85 million from our new teams, and we expect the Bay Area operations to be a net contributor to liquidity. Our loan pipeline is strong, and we are excited about the new clients and market traction. (James Samford, President & CEO)
Q: The net interest margin (NIM) increased significantly in Q2. What is the outlook for Q3?
A: We expect the NIM to moderate to around 3.40% to 3.45% in Q3. The margin is impacted by our reliance on wholesale deposits, but we hope to accelerate core deposit generation in the third quarter. (James Samford, President & CEO)
Q: What are your closing remarks on the company's performance and future outlook?
A: Five Star Bancorp is on a growth path, focusing on strategic initiatives, talent acquisition, and conservative underwriting practices. We have received numerous awards and recognitions in the first half of 2024. We remain confident in our resilience and long-term strategy. (James Samford, President & CEO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
