Street Talk - Episode 125 Tales from Top Performers Five Star Bancorp CEO - S&P Global Market Intelligence

Table of Contents

Call Participants.............................................................................................................. 3

Presentation.................................................................................................................... 4

Question and Answer...................................................................................................... 5

Call Participants

ATTENDEES

James Beckwith

Jimmy Pittenger

Nathan Stovall

Presentation

Operator

Welcome to Street Talk, S&P Global Market Intelligence podcast that offers listeners a deep dive into issues facing financial institutions and the investment team.

Nathan Stovall

I'm Nathan Stovall, and on this addition of Street Talk, we're kicking off a new series called Tales from Top Performers, where we're talking with executives at high-performing banks about their institution and experience in this sector, their views on current key issues facing the industry and the greatest challenges and opportunities they see ahead.

My colleague, Jimmy Pittenger, who leads our U.S. financial institutions commercial team, came up with this idea and has been hammering me for about a year to kick it off the ground. He not only has experience here with us at S&P, but he's previously worked in the banking sector himself. Jimmy is joining me here.

Jimmy, I love the idea when you first pitched it. Where did it come from? What did you think you would offer listeners in this format?

Jimmy Pittenger

Well, Nathan, thank you. It's great to be getting this podcast series kicked off. The idea was born out of conversations that we have annually at our Community Bankers Conference, really understanding the dynamics that propel community bank success across the country, whether it's a geographic advantage or disadvantage, bringing talent into the organization or potentially an opportunity for niche industry lending And then how do they foster growth within their institution.

So looking at the core drivers that provide invaluable insight on how these institutions thrive amidst evolving landscapes, the last 12 months with the interest rate environment, potential regulatory challenges that they're facing or on the horizon, we really wanted to dig in to bring those conversations to the forefront with this podcast series and better understand the dynamics with individual top-performing institutions.

So on the eve of our 2023 top bank rankings, we wanted to kick this series off with one of our top-performing institutions from 2022. Joining us on this podcast is James Beckwith, the President and CEO of Five Star Bancorp. Five Star Bancorp operates as the bank holding company for Five Star Bank, which is a $3.5 billion institution headquartered in Rancho Cordova, California, that provides a range of banking products and services to small- and medium-sized businesses, professionals and individuals in the Northern California region.

James, thank you for taking the time to join us and be our first guest on this new podcast series.

James Beckwith

Well, thank you, Jimmy, and thank you, Nathan, for having me. I'm looking forward to the discussion. Thanks so much.

Question and Answer

Jimmy Pittenger

Absolutely. So let's jump right in. Can you give us some background on how did you get into banking? Why? And what do you love about it?

James Beckwith

Well, it really goes back to when I started my career, when I came out of college. I'm a CPA, so I graduated with an accounting concentration business major and started with one of the, at that time, big 8 firms, Touche Ross, in San Francisco. I happen to be lucky enough to work for our national director of banking who operated out of the San Francisco office, and he put me on all his jobs. So I learned banking at a very core level, and that has kind of been the backbone of my career. From working with the firm and whatnot, I later transitioned as a CFO when I left the firm for a community bank, and my career has just really kind of tracked with that experience.

And what I love about it, it's really -- it gives us -- it gives me an opportunity to really make a difference in terms of the success of the businesses that we bank and the individuals. And it also -- it allows me to really help my colleagues grow and prosper in their careers, which is just a wonderful thing that I get to do to give back and be a mentor. I know when I look back on my career, I've had the benefit of a lot of great mentors that were very patient with me and understanding and saw some promise. And so I always look back on those experiences with the aim to the future in terms of passing it forward.

Jimmy Pittenger

Great. That's great background. So what would you say is your largest differentiator as a community bank in the markets that you serve? And what would you say drives the performance of Five Star Bank over the long term?

James Beckwith

Well, it's really about the fact that we can have very in-depth and sincere relationships with our customers, that we build these relationships over a number of years. We're constant in the market. There's not a lot of turnover at the community bank level. We're embedded in our communities. We see our clients in the grocery stores or at community events or at church, whatever the case may be. And it's really about being that rock of the community, if you will, somebody to be counted upon.

And I think that perception that our clients have, and it is reality, is that we're different than the majors. We chose to form our banks in the communities in which we live, work and play. And we're in service to our communities. And what's driven our performance over the long term is that we've got great clients. We've got great employees, and we work in great markets. But also, we're very purpose driven. There's a reason why we do things and that we're engaged. Our purpose is to really serve our customers. We're always in service.

And if you can do these things well, if you can serve your clients well, you can serve your employees well, if you can serve your communities well, the bottom line takes care of itself. And so we have a very broad view of stakeholders at Five Star Bank, and we want to make sure we do our very best for all of them. And the bottom line usually comes out extremely well if you can do that.

Nathan Stovall

James, you talked about relationship. It's definitely shown up in the strong deposit base that you've built over time. But like everybody else, you've seen deposits become more precious over the last year and cost rise and noninterest-bearing deposits decline. What does that look like for you? What have you done to combat that pressure? And what are you seeing in terms of deposit competition right now?

James Beckwith

Well, we're certainly not immune to that pressure, and we recognize this was coming. And so probably the end of third or fourth quarter of 2022, we've kind of changed our focus from a business development perspective to be less loan oriented and be more deposit oriented. And we changed our incentive plans for our business development folks to do just that. So now we're much more holistic, relationship driven and really after everybody's operating accounts.

And so that has really helped us kind of stem the tide of this competitive pressures and people moving money out of noninterest-bearing deposits into interest-bearing deposits and sometimes off the balance sheet, but I think we've done a pretty good job of maintaining some of those deposits, those relationships fundamentally by paying up for them, but being sensitive to what the client wants. We're worth it to our clients of maintaining a relationship.

We don't do well if somebody is just looking for the best rate possible. That's not the game that we play. In fact, when this was really prevalent probably about a year ago, and I said, well, the best deal you can get is a treasury. And if that's what you're looking for, you probably should do that. As long as you maintain your operating account with this, I think that's a good call.

And so it's hard to argue against a 5.5% yield that you don't have to pay state taxes on, at least in California. It's being honest with them. in helping them and not losing contact with them and not losing that relationship with them because sooner or later, rates will come back, and this inverted yield curve will shift. And so we're looking to play the long game, if you will, in this relationship bank -- based banking.

Jimmy Pittenger

James, a follow-up question there. Silicon Valley Bank, First Republic were both prevalent in your operating area. Did you have significant opportunities to pick up relationships there? And then was the timing kind of fortuitous of you going into 2023, changing your structure to kind of incent on picking up those deposit relationships?

James Beckwith

Well, in 2020 hindsight, you would say, yes. Here we are a year ago, I was kind of thinking about this last week because it was a year ago last week and -- when everything happened, when Silicon Valley Bank failed, Signature Bank failed, and what a difference a year makes in terms of what was going on in our space. And I think that was helpful.

I just remember a lot of CEOs of Silicon Valley Bank clients that were domiciled out here in the capital region, and a lot of them are very nervous about their money. Was it going to -- are they going to lose their Series A proceeds that they just raised? And it was uncomfortable 2 or 3 days for a lot of these CEOs and CFOs. And we happen to be there for them. So we did manage to pick up some relationships and a lot of balances.

On the First Republic side, we took advantage of that, I think, maybe in a more robust way in that we were opening an office down in San Francisco, and we've hired a lot of ex First Republic employees that were on the commercial banking side. And that's paying a lot of dividends right now in terms of onboarding new relationships that are quite robust.

So market's clear, Jimmy. Market's clear, and it just takes a matter of time. And we're part of that market clearing process, if you will, in terms of what's happening in Northern California. And so we happen to be at the right place at the right time with the right strategy to take advantage of this.

Nathan Stovall

I've learned for a long time that if you are on stable footing when things break, that's a good way to make money in this business. So good for you being able to capitalize on it. I want to pivot to the other side though. You talked about changing a little bit of focus with your producers. But on the loan side, everybody is spending so much time talking about commercial real estate exposure. You guys are like everybody else in community bank land in that you have a lot of CRE exposure, but it's a different flavor. You've got a pretty big focus on manufactured homes and RV parks.

Have you felt greater pressure from the regulatory community, investment community on those exposures? And maybe sort of a part 2 to that is, how do you talk about it? I know you put out a lot of granularity in your earnings updates on those. But what does that look like over the last 6, 12 months? And how do you approach it?

James Beckwith

Sure. We are -- we do have a concentration in CRE. And we've always had a concentration of CRE. We've always run above the 300% of total capital throughout our history. We came out of the ground as a commercial real estate bank. That was in our business plan. So with that backdrop, you could see that we've got some relief from the regulators in that the folks who organized Five Star Bank were fundamentally top of their game from a real estate development perspective. They were industrial guys, and they certainly knew that market inside and out.

And so as we carried on, we fell into this niche, and I do say fell into, it wasn't some grand strategy in terms of lending into the mobile home park space, if you will. And manufactured homes communities is probably a better label for it. and we've been able to do quite well in that.

But it does -- if you looked at our call reports, Jimmy, you would say, geez, you guys have this huge concentration in commercial real estate. But when you start peeling away the onion and looking at this, it really is in the mobile home park space and RV park space. They're different animals. They operate differently than an office CRE or retail CRE or even industrial.

And so it's been -- we spend a lot of time educating, I'm going to say, investors that don't know about the space, and we take the approach of as an owner of a mobile home park to really kind of familiarize the investment to our potential shareholders or current shareholders saying, well, here's how this space works. And we only bank the folks that have -- that are professionals. We don't bank the mom-and-pop owners of these parks. We bank the folks that have multiple parks across multiple states in most cases.

And so we really like the space. It's very granular. If you looked at -- and we explained this. If you looked at loss on default rates during the great -- or immediately after the Great Recession, you can see this particular asset class performed extremely well compared to other CRE asset classes. So we like where we are.

And so from a regulatory perspective, we haven't seen increased scrutiny because we've always been scrutinized because of our concentrations. And we deal with that by really managing our concentrations, reporting them, reporting them and having very granular analysis supported with market data. So we think we do it well. And the regulators don't necessarily have a problem with it, but they recognize who we are and that we know how to manage the concentration.

Nathan Stovall

Sunshine is often the best disinfectant. That's what I'm hearing there, and we've seen that play out over the years, for sure. Why -- in closing, we want to get the Jimmy's favorite part here of challenging opportunities. Jimmy?

Jimmy Pittenger

Yes. James, over the next 12 months, what would you say is the largest concern for Five Star Bank? And then what is the largest opportunity? Clearly, you've been able to take advantage of some of those. I'm interested to hear what you think over the next 12-month horizon, those 2 -- the different sides of the coin are there.

James Beckwith

Well, the largest concern is really something that faces the industry, which is really this inverted yield curve. It's a condition that is -- oh, gosh, you guys probably have pretty good data on this, but it's coming up on 2 years, right? And is there going to be a recession? Is there -- things going to slow down? But it certainly doesn't seem like that with unemployment being reasonably robust. So we just haven't seen evidence of that. But I'm going to tell you, the inverted yield curve has really hurt our margins, just like everybody else in the banking business. So that's probably the biggest concern.

We're poised to take advantage of some rate declines given the structure of our funding side. We hope that, that can happen. We're not betting on it per se, but it will help us if it does happen. So that's a concern. And then, of course, the resulting impact of a recession that could have on credit quality, which ours is very good. But nevertheless, it's going to affect the rest of the industry. And we all trade fundamentally as a group. It's hard to create differentiation. But those are a couple of things that are of concern.

And the largest opportunity for us is just to really garner new relationships as our markets, the primary markets in which we operate, is a bit of a free for all right now given all the M&A activity, given all the closures that have happened or failed banks that have happened. And so we think that that's created a lot of runway for us in terms of new customer acquisition.

And so we're taking advantage of that. And it's great to really go out and pick somebody, tell the prospect of what you're all about as an organization and really bring a lot of value to their banking situation. So I see that as our biggest opportunity far and away.

Nathan Stovall

Well, terrific. That's a great place for us to leave it, focus ending up on opportunity. I like that, especially from someone who's been a consistent high performer. Well, we certainly wish you well as you pursue that opportunity, James. Thanks for coming on.

Jimmy Pittenger

Thanks, James.

James Beckwith

Thanks, Jimmy, and thank you, Nathan.