Q2 2021 Five Star Bancorp Earnings Call

[music].

Welcome and 5 star.

Sure.

And core earnings webcast for the second quarter. Please note. This call. This conference and you are encouraged to listen and by webcast.

After todays presentation, there will be an opportunity on those provided with a download and number 2 ask questions and ask questions and press Star then 1 on your telephone keypad to withdraw your question. Please press Star then 2.

Before we get started let me remind you that today's meeting and include some forward looking statements.

Cats and domain.

And of applicable security 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 roles.

And may differ materially from these expectations.

Among other things.

And risk the ongoing COVID-19, pandemic may significantly affect the banking industry and the company's business prospects.

All of them on the inbound on the company's business and financial results will depend on future developments.

Which are highly uncertain and cannot be predicted and close.

And the scope and duration of the pandemic.

Its impact on the economy, the company's customers and its business partners.

And the effectiveness and distribute distribution on the COVID-19, vaccines, particularly all new variants emerge and actions taken by government.

And response to the pandemic.

For a more complete discussion of risks and uncertainties that may cause actual results to differ materially from the company's forward looking statements. Please see the company's quarterly report on form 10-Q for the quarter ended March 31, 2021, and in particular information centrally.

And where do you want and item 1.8 Rick factors here and.

Please refer to slide 2 of our presentation, which includes disclaimers regarding forward looking statements industry bad and non-GAAP financial information.

Included in the presentation as well as reconciliations to non-GAAP financial measures.

And for the most directly comparable GAAP figures. Please note that this event is being recorded not like to turn the presentation over to Mr. James backwards 5 store Bancorp President and CEO. Please go ahead.

Thank you for joining us today to review 5 Star Bancorp's financial results.

The second quarter of 'twenty 'twenty 1.

Joining me today is Heather Locklear, senior Vice President and Chief Financial Officer.

Before we discuss earnings I would like to note that we have included and overview of the company, including our management team mission and other important details and today's presentation materials.

<unk>, we recognize that we have a lot of new investors that may have not seen our roadshow presentation prior to our initial public offering.

So we've included some information on materials at the end of this presentation for your reference.

Our comments today will refer to the financial information that wasn't included.

And in the earnings announcement released yesterday.

To obtain a copy of the release please visit our website at Www 5 star Banc Dot com and click on the Investor Relations tab.

The second quarter of 2021 was a continuation of our.

Our organic growth story.

Loans deposits and total assets has consistently grown quarter over quarter.

Within the loan portfolio, the non PPP loans grew by $103.2 million or 7.6%, which was primarily within.

And factor at home community and multifamily concentrations of the loan portfolio.

Approximately $63 million of PPP loans are forgiven during the quarter and $1.2 million of PPP fees were recognized during the 3 months ended June 32020.

And the men leave.

Leaving a $121 million of PPP loans outstanding and $3.5 million of deferred fees to be recognized as of June 32021.

We anticipate the full balance of all PPP loans will be forgiven by the end of Q1 'twenty.

'twenty 2.

Our pipeline continues to remain strong at June 30.

And in existing verticals and we have consistently operated in as presented in the loan portfolio and commercial portfolio diversification slides loan originations excluding PPP.

Loans during Q2 were approximately $178 million, which is 44% higher than last quarter and pay offs, excluding PPP loans were $76 million, which was 29% lower than last quarter.

Asset quality continues to remain strong.

Strong with nonperforming loans, representing only zero to 3% of the portfolio.

At June 32021, there were 10 loans totaling $12.9 million and the aggregate on a COVID-19 deferment.

We anticipate all bar orders to return to.

COVID-19 contractual payment status.

After their COVID-19 and permits and.

We did not record a provision for loan losses during the quarter and the ratio of the allowance for loan losses to total loans, excluding PPP loans and non-GAAP measurement that is <unk>.

They're proud and our presentation.

And was 151% at June 32021.

Deposits grew during the quarter by $83.2 million or 4.2% since the first quarter of 2021.

Of which $30 million of.

Reconciled related to non interest bearing deposits.

Noninterest bearing deposits as a percentage of total deposits at June 32021.

Remained consistent with the prior quarter at 40%.

Additionally, with the completion of the IPO our capital position.

The growth more robust and we continue to be well capitalized.

Now that I have discussed the balance sheet I will hand, it over to Heather to discuss the results of operations Heather.

Thank you Jane and Hello, everyone.

Net income for the quarter was $9.8 million return on average assets.

And with 1.7 and 5% and return on average equity and 24% to 5%.

Average loan yield for Q2, 2021, with 473% and average loan yield excluding PPP loans with 4.7 and 6%.

Representing a decline of 11 basis points.

Over the prior quarter.

The current low rate environment has continued to put pressure on loan yields, which we have been able to partially offset by our decline and deposit costs, which were 20 basis points for Q2 compared to 24 basis points for Q1.

This has primarily been due to the decline of the local area.

Investment fund or a lease rate for local agency deposits during the quarter.

As a result of these factors our net interest margin was 348% for the quarter, which included $1.2 million of PPP fees recognized based on forgiven loans.

Non interest income remained relatively consistent.

For the second quarter with a slight increase and our gain on sale of loans of $1.2 million due to increased premium on SBA loan sales compared to the prior quarter.

Included in noninterest expense for the second quarter was <unk> 7 million and expenses related to corporate organizational matters, leading up to the IPO.

Agents, and <unk> 8 million and stock compensation expense for non recurring IPO related stock grants to certain members of the company's board of directors.

These expenses are presented and the other operating expenses line item at the consolidated statements of income.

Our salaries and employee benefits.

<unk> also increased during the quarter by $1.2 million with the addition of 8 new employees throughout the quarter.

Since the beginning of the year, we have added 5 business development officers and 6 lending support staff, which is contributing to our overall robust loan pipeline.

We've also increased head count our branch operations.

Operations compliance and accounting departments to support the continued growth and additional reporting requirements of the IPO.

We also converted to a C Corporation as of May 5.2021, as a result, we recognized a $4.6 million benefit for the true up of our net deferred tax assets.

And the $29.5 6% statutory rate, which was partially offset by a $2.4 million true up of the year to date tax provision expense using the effective tax rate of 27, 7%.

Each represents the weighted average rate between the 3.5%.

As corporation tax rate and the $29.5 C Corporation tax rate.

For the net total number of days each type of corporation will be and operations during the year.

Net income when applying a 29, 5%, 6% C Corporation tax rate would have been $7.4 million.

After 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.

Thank you Heather.

And have discussed today the bank continues to produce consistent earnings.

Contained strong capital levels solid credit quality and excellent liquidity.

We are proud to continue our mission to become the top business bank and all markets we serve.

And there has been some noteworthy acquisitions and the capital region and 'twenty 'twenty 1.

Debt, we have benefited from on the both the customer and talent acquisition sides.

We are on attractive place for.

Quiddity bankers to work and bring energy and enthusiasm to our market.

Since the beginning of the year, we have added business development officers and supported operational and lending staff and Additionally, we have added 2 new members to the board of directors our.

And is robust and we look forward to continue.

<unk> are a great organic growth story, and the capital region, and the Northern California market.

We appreciate your time today. This concludes today's presentation.

Now Heather and I will be happy to take any questions that you may have.

And.

And the question and answer session.

Good question those out and May Press Star then 1 on your telephone keypad.

Using a speakerphone please pick up on your handset before pressing the keys.

And for all your question. Please press Star then 2.

Questions will be taken in the order they are rich.

<unk>.

I'll begin on this question comes from.

And I keep on 1 K VW. Please go ahead.

Hi, good morning, everyone.

Alright, Jackie falloff.

Just wanted to start off on growth, you, obviously had tremendous growth and the quarter.

1 of the fewer banks Chad Paris.

Growth with PPP runoff and then obviously really strong when you exclude those balances and.

Is it more broad based across individual category or is there 1 area in particular, that's showing a lot of strength.

During the second quarter, we experienced a fair amount.

Net new.

<unk> and our mobile home Park.

Manufactured home community portfolio, we're very active and the space.

Both and state and out of state and I think we had probably around was it 60 plus million and originations and in that particular vertical.

And right behind it as our multifamily originations were also strong.

And between those 2 categories and made up the bulk of the increases but we're also remained very active and our faith based lending our agricultural lending and.

And.

And our small business lending within.

And the capital region.

So overall.

And we expected to see a fair amount of growth and our and our mobile home Park community portfolio and as we move forward.

I think that we're also going to see some steady growth within that particular vertical.

And when you look at the quarter's growth.

Does it feel more like there may have been some pent up demand and now that things are more open and I realize that throughout the country openings have been different throughout the pandemic, but did that have an impact on some of the quarter's volume.

I think that the biggest.

Back that we saw particularly on them and the manufactured home space and mobile home Park space.

Was that we added new customers as you may remember Jackie we focus on those professional firms that manage and operate several mobile home parks and we are able.

And then to add and expand our relationships.

Within those debt group I think right now we serve 15 of those operators and.

We seem to be adding 1 or 2 every quarter.

So we think that thats more of a function of just our customer base and the fact that we're making and.

Well to ourselves and that vertical throughout the United States.

Okay and.

And by now and the possible talked about the ability of these customers could you send the acquisitions from some of the smaller competitors are you seeing any changes and those trends that might provide lending opportunities and the future.

And for now.

For the most part all of our customers and the manufactured home space Mobile home park space or value add investors and they're constantly looking for opportunities and which they can come into a park.

The tenant raise rates.

Do the necessary.

Capex expenditures and just improve the quality of the park itself, thereby increasing.

Net operating income.

So I think that those trends are going to continue now as we understand it theres 50000, and these parks and the United States and only about 20% of them are managed and owned.

Cat professional mobile home park operators, so we see that.

Our opportunity in that space to be quite robust.

Okay, and I guess, that's more of where I was getting to is with those.

With those operators only owning 20%.

Are they themselves being any sort of change with kind of a 1 off parks that might be looking to sell.

Yes.

And the acquisition process by these operators as it takes several different forms.

Great and identifying underperforming parks and areas.

And which they are interest in geographic areas and which they are interested in and they will start a process I E. A dialog with the owners and.

And those processes can take a year or 2 years or.

A few months and it's really about identification and in terms of those underperforming.

And our parks and our our customers are professionals and.

It's they have a tried and true playbook of how to do that and we would expect them to continue to do that.

Across the United States and.

Certainly here on the West coast.

Okay, Great all right. Thank you for taking all my questions I'll step back now.

Thank you next question comes from Gary Tenner of D. A Davidson. Please go ahead.

Thanks, Good morning.

Just wanted to talk a little bit about.

Kind of for.

And for gallium loan yields on new.

And.

On your.

Core loan yield ex Pvp declined this quarter, which has not been uncommon and of course, given the rate environment, but maybe talk about where the loans have been coming on the balance sheet and.

On this recent quarter.

Sure.

I think.

<unk> and all the yields on the production in Q2, Heather I don't know if you have any data on that.

Kind of benchmarking and to be to be right around between 4% and $4.10.

Percent.

In terms of yield which is certainly less than what we have and the portfolio.

Leo.

And thats kind of what we've been seeing.

As a blended.

Yield on.

Of new product going into our portfolio.

Thank you.

And then just on the I'll try and be able to side of the balance sheet.

On.

And if.

And you've done a great job, bringing down funding costs and in recent quarters this quarter as well.

Is there much more room, and any particular deposit category to.

To bring those Laura.

I think a little bit more room.

And as Heather mentioned and our formal presentation.

Yes.

The local area investment rate has been coming down right now its at 26 basis points. We expect it to go down probably to around 20, maybe less in 'twenty, which is going to drive our cost of funds.

Right now on a run rate basis were.

For.

For the month of July is 10 basis points. So you can see that it's still coming down.

And certainly compared to Q to Q2.

Where it bottoms out it could be from I don't know probably 9 to 10 basis points on.

King.

And that's what my gut is kind of telling me.

And.

Which will certainly help us.

And then just last question from me, obviously, some higher cash balances this quarter between deposit growth I mean IPO proceeds.

And I think you've invested a little bit incrementally and the bond portfolio. So as you think of.

Liquidity.

The planned balance sheet management and how are you.

And that the back half of the year.

Well I certainly was at the low a lot more excited about investing and the bond portfolio and the tenure was up $1.6 zero as opposed to what it is right now so.

We're going to be cautious and prudent about that in terms of growing our bond.

And we deploy low.

And look for those opportunities to invest when rates do move up.

We are committed to growing the bond portfolio.

But and.

We do expect rates to move up it's just a question of when and so we're going to be ratably, increasing it certainly and the second.

And port for the year.

But nothing no major big bets.

I think it's probably going to be consistent with the first half of the year when you say Heather.

Yes, we really just want to make sure that we're being measured and steady and our investment and thats carrying portfolio.

As you know we much rather.

And with this liquidity and our loan portfolio and we are excited about where we are from a pipeline perspective.

And it's just a matter of closing those.

Those deals and we'll just have to see how the second half of the year goes but.

We're excited about where we stand.

Great. Thanks for.

Other expense.

Okay.

Yeah.

And with retire or you on the line with us.

Alright, Thanks, and good morning, Charles on Colombia.

Hate to go ahead with your question.

And thank you maybe to that last point, James and I think and the pathway talked about our loan pipeline running it on.

And now about 150 million to honor and and 75 million I understand.

Taking my call growth was very strong this quarter, just any update as to that and where the pipeline stands today relative to kind of prior quarters.

Sure.

Well I can tell you specifically I mean I look at it every day and probably multiple time, so were right around in terms of initial advance.

Which is probably the best and measurement for media to impact right around 300 million now.

And that's assuming there in terms of the impact of that is assuming that we're going to have a 100% pull through on that and that's never been the case.

But we're confident that we're going to have a seat a significant originations in.

Understand agree. It's just a question of you know sometimes deals fall out for whatever reason.

But it's certainly higher than what it was let's say when we entered.

You too.

And we're excited about that now I do what I do want to mention that we did add 5 BD Oh, So we've got them.

Some new talent that's coming in we've got a we took somebody from Wells Fargo, a California Bank <unk> Trust mechanics Bank bank of the West and our friends downstairs on the fourth floor American River Bank. So we're you know, we're hoping for them to make and immediate impact and so far.

Q through good and and of course, our our veterans that have been around here a long time are having great years. So we're excited about where we stand from a from a pipeline and new origination perspective.

Great that's excellent color and just to clarify the 5 Bds that were added is that part of it.

First of all time and points that were added throughout the past quarter.

Correct Okay. Thank.

Thank you maybe on on fee income just quickly and a nice quarter from SBA just on on the SBA sale front and Youre running at about $10 million to $11 million of loans sold per quarter I is that gonna be a.

And so this and kind of for sale run rate moving forward and then any kind of expectations for SBA gain on sale margins over the next couple of quarters.

Sure.

And that business is off historically from what it was previous years I think it certainly had.

And that's been impacted by the PPP.

Barely.

Process and the idle loans, which are very attract the idle loans are very attractive credits to folks. So you know we bomb.

You know, we expect that does tend to be steady, but not spectacular and what's happened with less volume.

Loans, the premiums that we're receiving it made up for that less volume.

And we're moving forward, so I think it could be probably pretty consistent.

And.

With that those types of levels given the premiums hanging in there and now we're getting paid.

116 and change.

On on our origination.

And <unk>, which is pretty significant now that that does not all net down to the bottom line. We have to split a we've got a lot of marketing costs associated with that and we got a split 50% if anything greater than 1 and with E. S. P. A and then we do our basis allocation and servicing strip valuation accounting so.

And if but if.

<unk> had its highest levels that debt I've seen.

And for that 10 year paper yeah.

Just to add a little color.

And the earnings release gross premium net premiums received were nicely into this quarter compared to $7.91 that of course, if there is an uptick and the premiums.

Hey, Sterling.

Mhm, but fair to say, maybe that as gain on sale margins kind of normalize there might be and step up and production as well that would offset part of that.

We sure hope so theres going to be a mad rush for people to get in the SBA and Q3 because of September 30th.

However, the rules change and I don't think theyre going to be extended the rules being and 90% guarantee and no guarantee fees have any PK by the customer.

And those are significant matters. So we.

And we hope this will spur some people forward.

In terms of getting on SBA, 7 loans and only time will tell.

Great. Thank you and then just 1 last 1 for me and a reserve level stayed pretty stable around 140 EBITDA.

For no provision this quarter, just given the growth any thoughts on on how the reserve and kind of provision trends over the next few quarters.

Well.

And our asset quality remains very very good.

We certainly.

Evaluated on a quarterly basis.

And <unk>.

I think that as we look at our qualitative reserves every quarter, we look at what what was set aside at 12.31 with respect to the SBA portfolio and make determinations about that.

And we'll just have to see.

And how that.

Net portfolio performs over this next quarter, but we're very comfortable with it where it is right now Heather yes and on.

Now for the qualitative reserve.

We kind of think that viewpoint.

Not out of.

Yeah on the Covid Delta there is picking up and we just don't know where are our small business loans are going to debt at the end of the year. So we were kind of waiting to to vet out and have 6 months of payment before we even start to consider releasing a reducing reserve factor.

And we don't really prefer reducer it there.

Okay great.

Okay.

And I appreciate you taking my questions and congrats on a on a good quarter.

Thanks, so much.

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

Great. Thank you on I'm going to thank everybody for joining us this quarter today's presentation demonstrated that 5 star Banc is continuing on a path of robust organic growth.

We are attracting and retaining talent, while preserving our culture driven by speed to serve and certainty of execution and.

Accordingly.

And trust us and they have direct access to us at all times. This is a key differentiator and our market and a driver of customer acquisition as evidenced by the strength of our growing pipeline.

Purpose and integrity driven banking are foundational to who we are we will continue to build meaningful.

<unk>, our co relationships and serve our shareholders customers employees and community.

These contact me or Heather if you have any questions. We look forward to speaking to you again in October for our third quarter 2021 earnings call have a great day and thank you for listening.

Okay.

<unk> reference is now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.