Q1 2022 Five Star Bancorp Earnings Call

April 26, 2022

Welcome to the Flagstar Bancorp first quarter earnings webcast.

Welcome to the five star Bancor first quarter earnings webcast. Please note this is a closed conference call and you were encouraged to listen via the web.

Please note. This is a close 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.

After todays presentation, there will be an opportunity for those provided with a dollar number to ask questions.

To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two.

To ask a question you May press Star then one on your telephone keypad.

To withdraw your question. Please press Star then two.

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.

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, including the continuing impact of the COVID-19 pandemic, and industry trends that may affect the company's future operating results and financial positions.

Including the continuing impact of the COVID-19 pandemic.

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.

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 different materialities from the company's forward statements, please see the company's annual report on Form 10K for the year ended December 31, 2021, and in particular, the information set forth in item 1A, risk factors therein.

For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from the Companys forward looking statements. Please see the company's annual report on Form 10-K for the year ended December 31 2021.

And in particular, the information set forth in item one a.

Risk factors therein.

please refer to slide two of the presentation, which includes disclaimers regarding four looking statements, industry data, and non-GAAP financial information included in this presentation, as well as reconciliations to non-GAAP financial measures to their most directly comparable GAAP figures, which is included in the appendix to the presentation. Please note, this event is.

Please refer to slide two of the presentation, which includes disclaimers regarding <unk> regarding forward looking statements industry data and non-GAAP financial information included in this presentation as well as reconciliations to non-GAAP financial measures to their most directly comparable GAAP figures, which is included in the appendix to the press.

Dentation.

Please note this event is being recorded.

I would now like to turn the presentation over to James Beckwith, five star Bancorp president and CEO .

I'd now like to turn the presentation over to James Peck with five Star Bancorp, President and CEO .

Thank you for joining us to review <unk> Bancorp's financial results for the first quarter of 2022.

Thank you for joining us to review Five Star Bancorp's financial results for the first quarter of 2022.

Joining me today is Heather Luck, Senior Vice President and Chief Financial Officer.

Joining me today is Heather lock 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 attain a copy of the release, please visit our website at fivestarbank.com and click on the Investor Relations tab.

Our comments today will refer to the financial information that was included in the earnings announcement released yesterday.

Attain a copy of the release please visit our website at five Star Bank Dot Com and click on the Investor Relations tab.

Yeah.

And the company overview section, we have provided a brief overview of our geographic footprint and executive management team.

In the company overview section, we have provided a brief overview of our geographic footprint and executive management team.

In the first quarter of 2022.

It exhibited a continued execution of our organic growth strategy, as evidenced by our earnings, expense management, and balance sheet trends during the quarter. Additionally, loans and deposits and total assets have consistently grown since the previous quarter.

It exhibited a continued execution of our organic growth strategy as evidenced by our earnings expense management and balance sheet trends during the quarter.

Additionally, loans and deposits in total assets have consistently grown since the previous quarter.

Yeah.

Our pipeline continues to remain substantial at the end of the first quarter of 2022 within the verticals we have historically operated in.

Our pipeline continues to remain substantial at the end of the first quarter of 2022. Within the verticals we have historically operated.

as presented in the loan portfolio diversification slide.

As presented in the loan portfolio diversification slide.

Non PPP loans held for investment a non-GAAP measurement that as reconciled in our press release increased during the quarter by.

Non PPP loans held for investment, a non-GAAP measurement that is reconciled in our press release, increased during the quarter by

$166 3 million or eight 7% from the prior quarter.

166.3 million or 8.7% from the prior.

primarily within the commercial real estate concentration of the loan portfolio.

Merrily within the commercial real estate concentration of the loan portfolio.

Approximately $26 million of PPP loans were forgiven and point $6 million of PPP income was recognized during the first quarter.

Approximately 20.6 million of PPP loans were forgiven and 0.6 million of PPP income was recognized during the first quarter, leaving 1.5 million of PPP loans outstanding and 42,000 of deferred fees to be recognized at quarter end. We anticipate the full balance of the PPP loans to be forgiven in the near term.

Leaving $1 $5 million of PPP loans outstanding and 42000 of deferred fees to be recognized at quarter end.

Anticipate the full balance of the PPP loans to be forgiven in the near term.

Loan originations excluding PPP loans during the quarter were approximately $312 million and payoffs excluding PPP loans were $1.0 million.

Loan originations, excluding PPP loans during the quarter were approximately $312 million and pay offs, excluding PPP loans.

$146 million.

Additionally, $26 million of PPP loans forgiven.

Additionally, $20.6 million of PPP loans were forgiven.

ultimately resulting in a net increase of loans of $145.7 million from the prior quarter.

Ultimately, resulting in a net increase of loans of $145 7 million from the prior quarter.

Asset quality continues to remain strong with nonperforming loans, representing only 0.06% of the portfolio.

Asset quality continues to remain strong, with non-performing loans representing only 0.06% of the portfolio.

increasing from the last several quarters. At quarter end, there were six loans totaling $12.2 million.

Increasing from the last several quarters.

Quarter end, there were six loans totaling 12 2 million.

an aggregate on the COVID-19 deferment. We anticipate all borrowers to return to their pre-COVID-19 contractual payment status after their COVID-19 deferment ends.

In aggregate on the COVID-19 to permit we anticipate all borrowers to return to their pre COVID-19, the contractual payment status after their COVID-19 performance and.

At the end of the first quarter, the allowance for loan losses totaled $23.9 million. We recorded a $1 million provision for loan losses during the quarter.

At the end of the first quarter the allowance for loan losses totaled $23 9 million.

We recorded a $1 million provision for loan losses during the quarter.

The ratio of the allowance for total loans, excuse me, total loan losses to total loans excluding PPP loans, a non-GAAP measure that is reconciled in our press release, was 1.15% and quarter end.

The ratio of the allowance for total loans excuse me total loan losses to total loans, excluding PPP loans, a non-GAAP measure that is reconciled in our press release was 115% at quarter end.

Loans designated as watch and substandard totaled approximately $17 million at the end of the quarter.

Loans designated as watch and substandard totaled approximately $17 million at the end of the quarter, representing an increase in watch loans of $5.4 million and a decrease in substandard loans of $7.6 million from the previous quarter.

Representing an increase in watch loans of $5 4 million and a decrease in substandard loans.

Of $7 6 million from the previous quarter.

This reduced our reserves related to classified and watch loans by approximately 100000, which is offset by additional provisions for loan growth during the quarter.

This reduced our reserves related to classified and watch loans by approximately $100,000.

offset by additional provisions for loan growth during the quarter.

Okay.

Now that we have discussed the loan portfolio portfolio I will hand, it over to Heather to discuss deposits capital and the results of operations Heather.

Now that we have discussed the loan portfolio, I will hand it over to Heather to discuss deposits, capital, and the results of operations. Heather?

Thank you, James, and hello, everyone. During the first quarter, deposits increased by 217.2 million or 9.5% as compared to the previous quarter.

Thank you James and Hello, everyone.

During the first quarter deposits increased by $217 2 million or nine 5% as compared to the previous quarter.

Approximately $39.2 million of the change related to non-interest-bearing deposits. Non-interest-bearing deposits as a percent of total loans for the first quarter decreased to 37.6 percent from 39.5 percent in the previous quarter.

Approximately $39 2 million of the change related to non interest bearing deposits non interest bearing deposits as a percent of total loans for the first quarter decreased to 37, 6% from 39, 5% in the previous quarter.

We have had strong deposit growth over the last several quarters, including the current quarter.

Cost of total deposits was nine basis points during the first quarter of 2022.

We continue to be well capitalized with all capital ratios well above regulatory thresholds for the quarter.

Net income for the quarter was $9.9 million, return on average assets was 1.53%, and return on average equity was 17.07%.

Net income for the quarter was $9 9 million return on average assets was 153% and return on average equity was 17, 7%.

Average loan yield for the quarter was 4.53%, and average loan yield excluding PPP loans, a non-GAAP measure that is reconciled in our presentation, was 4.43%, representing a decrease of 13 basis points over the prior quarter.

Average loan yield for the quarter was $4 five 3% and average loan yield excluding PPP loans, a non-GAAP measure that is reconciled in our presentation with $4 four 3%, representing a decrease of 13 basis points over the prior quarter.

This decrease was primarily due to changes in the macroeconomic environment, which caused the majority of the company's fixed rate loans funded in the current quarter to recognize lower yields than those recognized in prior quarters.

As a result of these factors our net interest margin was three 6% for the quarter, which included 600000 of PPP income recognized based on forgiven loans, while net interest margin for the prior quarter was 367%, which included $1 1 million PPP income.

As a result of these factors, our net interest margin was 3.6 percent for the quarter, which included $600,000 of PPP income recognized based on forgiven loans, while net interest margin for the prior quarter was 3.67 percent, which included $1.1 million of PPP income recognized based on forgiven loans.

Recognize based on forget in loans.

The change in the yield curve as a result of interest rate hikes that occurred during the quarter had a negative impact on the company's accumulated other comprehensive income in the amount of $7.2 million, primarily in our mortgage-backed and municipal securities portfolios of $4.4 million and $2.6 million, respectively.

The change in the yield curve as a result of interest rate hikes that occurred during the quarter had a negative impact on the companys accumulated other comprehensive income and the amount of $7 2 million, primarily in our mortgage backed and municipal securities portfolios at $4 4 million and <unk>.

$2 $6 million respectively.

This caused the decline in tangible book value per share, which is a non-GAAP financial measure discussed in our press release, which was partially offset by increases to equity as a result, net net income earned in the quarter.

This caused a decline in tangible book value per share, which is a non-GAAP financial measure discussed in our press release.

which was partially offset by increases to equity as a result of net income earned in the quarter for a net declined tangible book value per share of 25 cents.

For a net decline in tangible book value per share of <unk> 25.

Noninterest income increased to $2 2 million in the first quarter from $1 8 million in the previous quarter.

Non-interest income increased to $2.2 million in the first quarter from $1.8 million in the previous quarter due primarily to increases in loan-related fees from the recognition of $300,000 in swap referral fees during the quarter.

Due primarily to increases in loan related fees from the recognition of $300000 in swap referral fees during the quarter.

and a $300,000 gain recorded on a distribution received on an investment in a venture-backed fund.

And a $300000 gain recorded on a distribution received on an investment in a venture backed fund.

These increases were partially offset by a decrease in gain on sale of loans of $200,000, largely due to a decline in effective yields as a result of declining premiums paid in the secondary market and uncertainty surrounding the timing of rising interest rates.

These increases were partially offset by a decrease in gain on sale of loans of 200000, largely due to a decline in effective yields as a result of declining premiums paid in the secondary market and uncertainty surrounding the timing of rising interest rates.

Non-interest expense increased to $9.6 million in the first quarter from $9 million in the previous quarter, driven primarily by increased salaries and employee benefits as a result of increases in headcount and increases in employer taxes for commissions and executive bonus payments made during the quarter.

Noninterest expense increased to $9 6 million in the first quarter from $9 million in the previous quarter, driven primarily primarily by increased salaries and employee benefits as a result of increases in head count and increases in employer taxes for commissions and executive bonus payments made 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.

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. I want to thank everybody for joining us as we discussed our first quarter results.

Thank you Heather I want to thank everybody for joining us as we discussed our first quarter results.

We recognize that entrepreneurs are the foundation of a strong and growing economy, and we consistently provide them a greater level of service than our competitors can provide, which has resulted in seized market opportunities and growth in loans and deposits.

We recognize that entrepreneurs are the foundation of a strong and growing economy, and we consistently provide them a greater level of service than our competitors can provide which has resulted and seize market opportunities and growth in loans and deposits.

The strength of the bank's first quarter financial results as truly emblematic.

The strength of the bank's first quarter financial results is truly emblematic of a reputation built on trust, speed to serve, and certainty of execution, all of which support our clients' own success. In addition to earning the...

Of our reputation built on trust speed to serve and certainty of execution.

All of which support our clients' homes success in.

In addition to earning the trust of our customers.

Our approach to banking has also led to an earned industry recognition. In the first quarter, we learned that Five Star Bank ranked...

Our approach to banking has also led to an earned industry recognition in the first quarter, we learned that five star Bank ranked.

on the 2021 S&P Global Market Intelligence Top 100 Best Performing Community Banks in the nation with assets less than $3 billion. The bank also was awarded the prestigious 2021 Raymond James Community Bankers Cup, ranking in the top 10% of community banks in the nation. We are honored and humbled to be so recognized.

On the 2021 S&P global market Intelligence top 100, best performing community banks in the nation with assets less than $3 billion.

Greg also was awarded the prestigious 2021, Raymond James Community Bankers Cup ranking in the top 10% of community banks in the nation.

We're honored and humbled to be recognized.

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.

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.

Thank you we will now begin the question and answer session to ask a question those dialed in May Press Star then one on the telephone keypad, if you're using a speakerphone. Please pick up your handset before pressing the keys.

Thank you, we will now begin the question and answer session.

To ask a question, those dialed in may press star than one on the telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press star then two. Questions will be taken in the order of two.

To withdraw your question. Please press Star then two.

Questions will be taken in the order they are received.

Okay.

And the first question will come from Stuart Lotz with KBW. Please go ahead. Hey, guys.

And the first question will come from Stuart Lotz with <unk>. Please go ahead.

Hey, guys good morning.

Good morning.

I guess, you know, I guess my first question, if we could start off on your outlook for the margin, you know, looking back at my notes from last quarter and from the, you know, the first quarter call, a lot has changed both in terms of the forward curve and.

Good morning.

I guess I.

I guess my first question, if we could start off on.

On your outlook for the margin looking.

Looking back at my notes from last quarter and from the first quarter call. A lot has changed both in terms of the forward curve and.

You know, just given the expectation for accelerated hikes this year, I think your previous guidance was you expected about a $75,000 per month.

Just given the expectation for accelerated hikes this year.

Yeah, I think your previous guidance was you expected about a 75000.

Per months benefit to NII.

benefit to NII per hike. I just wanted to see how, you know, if that's still a good run rate, just given the expectation for, you know, the accelerated pace of hikes this quarter. And then I guess the second part to that question is...

Her hike.

I wanted to see how it is.

That's still a good run rate.

Just given the expectation for the accelerated pace of hikes. This quarter and then I guess the second part to that question is.

Regarding deposit betas, how you guys are thinking about.

regarding deposit betas, how you guys are thinking about the outlook for CDs and for money market demand accounts, given we saw a slight increase in the first quarter. You know, the

The outlook for Cds and for money market demand accounts, given we saw a slight increase in the first quarter.

Even though.

we got the hike late in March. So sorta, a lot going on there, but yeah, just starting on the margin. Thanks.

We got the hike late in March.

Sorry.

There's a lot going on there, but yeah just.

Just starting on the margin.

Sure. Thanks, Stuart.

Sure.

Hey, Stuart.

Yes, there is a lot of dynamics going on with the margin as we look forward in the quarter and for the remainder of the year.

Yeah, there's a lot of dynamics going on with the margin as we look forward in the quarter and for the remainder of the year. You know, you had 125 basis point hike and then expectations for next week is going to be another 50 basis.

You had 125 basis point hike and then expectations for next week is going to be another 50 basis points.

So we've certainly taken a look at that in terms of what it might mean.

So we've certainly taken a look at that in terms of what it might mean, just that particular dynamic in terms of Fed fund hikes and result in prime rate hikes.

That particular time that dynamic in terms of.

Fed fund hikes and result in prime rate hikes.

What it might mean so heather.

what it might mean. So, Heather, for 100 basis points, what are we thinking on an annualized basis?

For 100 basis points, what are we thinking on an annualized basis.

Yeah, so on an annualized basis, we're estimating about a $3.8 million lift to net interest income, and then as part of that assumption, Stuart, we're assuming a deposit beta of about 30 percent.

Yes, so on an annualized basis, we're estimating about a $3 8 million or lift to net interest income.

And then as part of that assumption, Steve where we're assuming a beta deposit beta of about 30%.

I appreciate that color.

And then in terms of I guess this quarter I was kind of surprised to see.

And in terms of, you know, I guess this quarter, I was kind of surprised to see core loan yields fall in, you know, per your comments in the release, some of that had to do with just the timing of repricing. So it's given, you know, I think the majority of your your loan book is really tied to, you know, the five year treasury. And we've seen that.

Core loan yields fall.

Per your comments in the release some of that had to do with just the timing of of repricing. So just given I think the majority of your your loan book is really tied to the five year Treasury and we've seen that.

You know, kind of, you know, really climb over the last, you know, probably two months or so. How are you thinking about, I guess, you know, core loan yields this quarter, with the anticipation for a 50 basis point hike? I mean, do you think we've reached the bottom?

Kind of really climbed over the last probably two months or so how are you thinking about I guess core loan yields this quarter.

With the anticipation for 50 basis point hike I mean do you think we've reached the bottom.

I don't think so, and I think it has everything to do with the timing of how we process and originate loans. We do have provisions in which we allow our customers

I don't think so and I think it has everything.

To do with the timing of how we process and originate loans we.

We do have provisions in which we allow our customers.

prospects to lock a rate. Those fundings can happen up 60 days, maybe in some cases 70 days after that rate lock. So what you saw in the first quarter is some...

And prospects to lock a rate.

Those fundings can happen up 60 days, maybe in some cases 70 days after that rate lock.

So what you saw in the first quarter or something.

some rates that were pre-10-year move being funded. I think we still have a little bit of that left in the pipeline, not much. I think as we look at the pipeline as it exists today, which is quite substantial, you're going to see mid-fours and maybe some five handles in terms of our production. I'm anticipating our margins and our loan yields are probably going to drop.

Some rates that were.

Pre.

I'm going to say <unk> 10 year move.

Being funded.

We still have a little bit of that left in the pipeline not much.

I think as we look at the pipeline as it exists today, which is quite substantial.

Youre going to see mid fours, maybe some five handles in terms of our production.

Anticipating our margins and our loan yields are probably going to drop.

Maybe seven basis points per quarter for the next two quarter quarters, and then level out after that and begin to rise.

maybe seven basis points per quarter for the next two quarters, and then level out after that and begin to rise.

Yes.

And then just to add a little bit more color, Stuart, on the loans that are scheduled to reprice that are tied to the five-year Treasury this year, we only have about like a little over $45 million that will reprice this year of loans originated five years ago. So hopefully that adds a little more information.

Got it and then just to add a little bit more color on the loans that are scheduled to reprice that are tied to the five year Treasury. This year, we only have about a little over 45 million that will reprice this year.

Loans originated five years ago, so hopefully that adds a little.

More information to that in your assumptions.

Okay, yep, that's certainly helpful. And I guess James, turning to the growth outlook, I think last quarter, you just given the strong 40% growth last year, you'd got it to kind of a more measured pace of growth this year, but the first quarter, we saw another 30% plus growth. I'm just curious what the pipeline looks like today and maybe what you're given the strong growth in the quarter. Are you raising that guidance for this year?

Okay.

That's certainly helpful.

And I guess, James turning to the growth outlook I think last quarter.

Just given the shrunk 40% growth last year, you had you had guided to kind of a more measured pace of growth this year, but the first quarter, we saw another <unk> <unk>.

30% plus growth.

Curious what the what the pipeline looks like today, and maybe what you're given the strong growth in the quarter.

You're raising that guidance for this year.

Yeah, some dynamics with respect to the comments that are in the last quarter. Just to give you some insight, you know, we had a substantial fourth quarter production. And as we entered into the year, our pipeline was well down from what it had been in Q3 and Q4 of last year. So my expectation was, well, geez, it's not going to be, certainly it's not going to be as strong and without any visibility.

Yeah.

Some dynamics with respect to the comments that are in the last quarter just to give you some insight.

We had a substantial fourth quarter.

Production and as we entered into the year, our pipeline was well down from what it had been in Q3 and Q4 of last year. So my expectation was.

Oh geez, what's not going to be certainly is not going to be a strong.

Without any visibility in terms of.

As expressed by what our pipeline is.

expressed by what our pipeline is. That's why I guide it that way. As we move forward, it has everything to do with the fact that we're really executing on the front end. Our pipeline is substantial right now. It's probably the highest it's ever been. Now, you never know what you're going to pull through ultimately, but we think that the first quarter results in terms of dollars.

That's why I guided that way as we move forward and and.

Has everything to do with the fact that we're very we're really executing on the front end in our pipeline are substantial right now probably the highest its ever been now.

Now you never know, what you're going to pull through ultimately but.

We think that the.

<unk> first quarter results in terms of dollars.

We think that that's certainly, we're very capable of continuing that. So we're excited about where Q2 and Q3 is going to lead us. So I would have an expectation of being able to do, in terms of net loan growth, the same amount in Q2 as we saw in Q1.

We think that that's certainly.

We're very capable of continuing that.

So we're excited about where Q3 Q2, and Q3 is going to lead us.

So I would have an expectation of being able to do it.

A net loan growth of the same amount in Q2 as we saw in Q1.

And is that really most of that growth stemming from the manufacturing home community portfolio? And I think the last two quarters, that's driven about half of your total growth.

So does that is it really most of that growth stemming from the manufactured home community portfolio I think the orders that's German.

<unk> about half of your total growth.

Yeah, I think a lot of it is. Yeah, but you know, we've got a lot of other deals in the pipeline outside of that particular vertical. So it's certainly, you know, we lead with that, that there's a lot of other deals that are around that that are not in that space that are commercial real estate oriented. We're executing well, and certainly in that space and also in our in storage, but also in our faith based business. We're excited about the prospects there.

Yes, I think a lot of it is.

Yeah.

We've got a lot of other deals in the pipeline.

Outside of that particular vertical so it's.

Certainly we'd lead with that.

A lot of other deals that are around.

That are not in that space that are commercial real estate oriented.

We're executing well.

And certainly in that space and also in art and storage, but.

But also in our faith based business we're in.

Excited about the prospects there so.

as we continue to bring on new customers in California.

As we continue to.

Bring on new customers in California.

And most of those new customers that we're bringing on are quite substantial.

in our faith-based vertical. So I think it's a it's a mix that certainly mobile home parks are a big component of that and the biggest.

And our faith based vertical so I think it's.

It's a mix, but certainly a.

Mobile home parks are a big component of that and the biggest component.

Great.

Maybe just one more for me, just in terms of capital plans. I don't think the AOCI hit this quarter was a big factor for your capital versus some of your peers. Because given your outlook for pretty strong growth this year, and I think you've mentioned in the past, you were looking at possibly redeeming the sub-debt later this year and maybe turning the lock in a more attractive rate. What's your appetite for new capital at this point?

And then maybe just one more from me just in terms of capital plans I don't think the OCI had this quarter was.

The bigger factor for your capital versus some of your peers just given your.

The outlook for pretty strong growth this year and.

I mean, I think you've mentioned in the past you were looking at possibly redeemed.

Redeeming the sub debt later this year and maybe trying to lock in a more attractive rate. So just what's your appetite for new capital at this point.

I think that that's certainly what we talked about internally is we're coming up on five years and so we'll have a chance to kind of refly that out and maybe take down another chunk. So that's what we're thinking about. We've got to execute on that.

I think that.

That's certainly what we've talked about internally.

As we're coming up on five years, and so we'll have a chance to kind of.

A replay that out and maybe take down another chunk.

So that's what we're thinking about but we've got to execute on that.

With the IPO proceeds, it gives us a better ability or a larger ability to raise sub-debt.

With the IPO proceeds so it gives us a better ability or a larger ability too.

To raise sub debt.

And, you know, we like to maintain it, you know, a double leverage ratio of 125% or less.

And we like to maintain it.

A double leverage ratio of 125% or less.

So, we do have some capacity. That's probably towards the end of the year.

So we do have some capacity.

It's probably towards the end of the year.

Probably Q4, maybe even a Q1 type of <unk>.

probably a Q4 or maybe even a Q1 type of execution. We don't have all that buttoned down just yet, but that's probably going to be outside of internally generating capital, probably what we're looking to do. We still think you can execute at reasonable rates, certainly not what we saw in 2021 in terms of some of the bigger issuers.

Execution.

We don't have all that buttoned down just yet but.

That's probably going to be outside of internally generating capital probably.

What we're looking to do we still think you can executed at reasonable rates.

Really not what we saw in 2021 and so in terms of some of the bigger issuers.

But, you know, given our earnings performance and our return on equity, it's going to.

But.

Given our earnings performance and a return on equity it's going to.

And it has every chance of being highly accretive to raise that debt.

Great.

All right. Thanks for taking my questions. I will hop back in the queue.

Alright, Thanks for taking my questions I will hop back in the queue.

Thank you Stuart.

The next question.

And the next question will come from Andrew Terrell with Stevens. Please go ahead. Good morning.

<unk> will come from Andrew <unk> with Stephens. Please go ahead.

Hey, good morning, James one another.

Good morning, good morning.

uh... maybe to start um... and i think we'd discussed last quarter one q might be the letting low point on expenses and then built throughout the year uh... i think expenses came in a little higher than i was thinking this quarter just commute you help talk to kind of put them takes for expenses as we move forward not just about the balance of the year

Maybe to start.

I think we discussed last quarter <unk> might be the low point on expenses and then build throughout the year.

I think expenses came in a little higher than I was thinking this quarter, but just can you help talk us through kind of the puts and takes for expenses as we move forward throughout the balance of the year.

Yeah, So we're still projecting about a $1 40.

Yeah, so we're we're still projecting about a 140.

non-interest expense to assets ratio. Yeah, they did tick up just a little bit, just more on the employer taxes side this quarter, but you will see the commission's expense ramp up as BDOs get through their tiers, or throughout the year as their production hits the mark. But yeah, we're still budgeting about $140.

Net interest noninterest expense to asset ratio, yes.

Yes, they did tick up just a little bit more on the.

Employer taxes side this quarter, but you will see the commissions expense ramp up is as videos get through their tears.

Ratably throughout the year as their production hits the Mark.

But yes, we're still budgeting about.

140 ratio.

Okay, got it. Yep, I think we've seen some some headcount increases Andrew. To take advantage of some opportunities. We brought on.

Okay got it.

Yes, I think we've seen some some head count increases Andrew.

To take.

Dan is there are some opportunities.

We've brought on.

um some at least one new BDO this year and uh actually two.

Some of at least.

One new video this year.

Actually two.

And so we're looking for those opportunities to continue to push growth in the verticals in which we want to be in. So I think, you know, you bring on a producer.

And.

So we're.

Looking for those opportunities.

To continue to push growth.

And the verticals in which we want to be and so.

I think you bring on a producer.

Andrew and then, you know, that's just not it sometimes you've got to have some people around them And so I think our head count is is certainly up from from

Andrew and then.

Just not add sometimes you got to have some people around them and so I think our head count is certainly up from from 12 31.

Yeah, we added seven Hudson.

Yeah, we added seven heads since 1231.

12 31.

Seven.

All right. That's perfect. That's where my next question was headed, James. So for the two BDOs you said hired this quarter, I guess first was that a net number and then any specific kind of

Okay Alright.

All right that's perfect.

For my next question was what kind of James.

So for the <unk> you said higher this quarter I guess first is that a net number.

And then any specific kind of.

lending verticals, they're more geared towards just kind of broader commercial bankers.

Lending verticals, they're more geared towards or just kind of broader commercial bankers.

One guy is going to add Gary.

One of the hires was an ad guy and the other one more of a practice person.

One of the hires was an AD guy and the other one.

More of a practice person.

Hum.

No optometrists, Dennis veterinary that type of book.

an optometrist, dentist, veterinary, that type of a.

that type of a professional, but specifically with a skill set to deal with those two verticals.

That type of a professional.

But.

Typically with the skill set to deal with those.

Those two are two verticals.

Got it. Okay. I was hoping, I know the SBA income, gain on sale income came in a bit this quarter, kind of as expected. I was hoping you could just provide some updated expectations, both on kind of the SBA sold loan volume as well as kind of gain on sale margin.

Got it okay.

And then I was hoping I know.

Income gain on sale income came in a bit this quarter kind of as expected was hoping you could just provide some updated expectations. Both on kind of the SBA sold loan volume as well as kind of gain on sale margin.

Well, it's a it's a very difficult thing to predict.

Well, it's a it's a very difficult thing to predict the.

The.

As we move forward.

I think that our production is going to be less granular so you're going to have some pretty big credits come in there and we're going to finance the business acquisition loan.

think that our production is going to be less granular, so you're going to have some pretty big credits coming there if we're going to finance a business acquisition loan. That will certainly not make the revenue stream smooth, per se. You could have a big month and then the next month not so much.

So.

Capital certainly not make the revenue stream smooth per se you could have a big month and then the next months not so much.

I think generally speaking premiums are down okay.

I think, generally speaking, premiums are down, probably from $114,000 down to $112,000, so that's a headwind with respect to that business.

<unk>.

From a $1 14 down to 112, so that's a headwind with respect to that business.

But it's going to be slow and steady, I think, that we guided.

But it's going to be slow and steady I think that we guided.

to say around $300,000 on an average a month in terms of gains. That sounds about right as I look forward for the remainder of the year. That is helpful.

I'm going to say around 300000 on an average.

<unk> <unk>.

In terms of gains.

It sounds about right.

As I look forward.

For the remainder of the year.

That's helpful.

No that's very helpful. I appreciate it.

And then I wanted to go back to some of the core loan yield commentary as well.

I hear you on kind of the maybe locking rate for 60 to 70 days or so, but just curious, you may have provided and I missed it, I guess where you're originating credit at today from a yield perspective versus where you were at kind of 90 days ago. And I guess where I'm going is trying to get the lift and kind of new originations, but then have you also seen any kind of spread compression as you're pricing new credit?

I hear you on kind of the.

Maybe locking rate for 60 to 70 days or so but just curious.

We have provided and I missed that and I guess, where you're originating credit at today from a yield perspective.

Versus.

You were at kind of 90 days ago, and I guess, where I'm going is I'm trying to get the lift in kind of new originations, but then have you also seen any kind of spread compression.

As you price a new credit.

So, you know, we price off the 5 and the 10 for the most part, and those spreads can be either, you know, 200 to 225, sometimes 250 over those indexes. So if you're...

So we price off the five and the 10 for the most part and those spreads can be either 200 to 225, sometimes $2 50 over those indexes.

So if you're if you price off that.

you know, let's take a 250 spread. I mean, you've got to.

Let's take the $2 50 spread I mean, you've got a.

540.

rate. And that's what's going on right now. I think it's taken the market, it's taken the market a long time to...

Right.

And that's what's going on right now.

It's taken a market it's taken the market a long time too.

for these rate increases to kind of work through borrowers' expectations.

For these rate increases to kind of work through borrowers expectations I'm going to say Q.

Q3, Q4 last year, everybody thought I think I can get at a three handle alone.

Well, that's not happening anymore.

You know the stuff that we're currently originating are all are are all four

The stuff that we're currently originating.

Are all 4% or 4% for 2545 or $4 75, So I think.

or 4%, 4.25, 4.50, 4.75. So I think,

Production in terms of current production.

going to equal where we are right now in our overall portfolio yield, but we still have to work through a couple of what I'm going to call legacy locks.

Is going to equal.

Where we are right now in our overall portfolio yield, but we still have to work through a couple I'm going to call legacy blocks.

you will. And as I guided earlier, that's going to have an impact of maybe seven basis points.

You will.

And as I guided earlier, that's going to have an impact of maybe seven basis points.

for the next two quarters and then I expect portfolio yields to rise after that.

For the next two quarters and that I expect.

Portfolio yields to rise after that.

Understood. Okay. I appreciate you taking my questions.

Sure.

Again, if you have a question. Please press Star then one.

Again, if you have a question, please press star then one. The next question will be from Gary Tenor from D.A. Davidson. Please go ahead. Thanks. Good morning.

The next question will be from Gary Tenner from D. A Davidson. Please go ahead.

Thanks, Good morning.

Not to be a dead horse on the production yield and loan yield questions, but average loan yield 453, I think, here.

Not dead horse on the HAE.

On the.

Production yields and loan yield questions, but.

Average loan yield of 453, I think here in the.

first quarter and that seems to be pretty well in line with what you were talking about, James, in terms of production. So I guess, you know, I get that maybe there would be some more downward pressure in the second quarter if you've got some locks to work through. Um, but given where that, you know, five years now, uh, as you start looking forward to the third quarter, what would be the dynamic that might, you know, result in another 67 basis point downward move?

First quarter and that seems to be pretty well in line with what you were just talking about James in terms of production. So I guess I get that maybe there'll be some more downward pressure in the second quarter, if you've got some locks to work through.

But given where the.

Five years now.

As you start looking forward to the third quarter, what would be the dynamic that might.

Result, another six seven basis point downward move ammonia.

Because it seems like we will get through those old blocks at that point, Yeah. I think it's just the it's just the impact of.

Yeah, I think it's just the, it's just the impact of that type of production. Well, we hope certainly hope to do better than that. And

That type of production.

Well, we certainly hope to do better than that.

And.

And there is going to be there is going to be some type of a lift that's going to come out of.

And there is going to be a, there is going to be some type of a lift that's going to come out of, you know, our prime, our prime based loans and also our

Prime or prime based loans and also our.

<unk>.

You know, our swap loans, we've got about probably as we sit here right now, about $130 million that are either LIBOR or SOFR related that are going to move up, you know, well, 50 basis points in the next move. So I'm, I'm, the reason why I'm guiding that way is that we still have a fair amount in our pipeline that the rates were blocked, you know,

Our swap loans, we've got about probably as we sit here right now about $130 million that are either LIBOR or silver related that are going to move up.

Well 50 basis points in the next moves so.

The reason why I am guiding that way is that.

We still have a fair amount in our pipeline.

The rates were blocked.

60 days ago.

that were done at low 4.

That were done at a low four.

low four handles. As that works through, it's going to have an impact in terms of

Low four handles and so as that works through.

It's going to have a.

An impact in terms of our overall portfolio yield.

A lot of dynamics going on with respect to this, but that's what my expectation is right now. I hope to do better. Okay? But that's what my expectation is right now. Okay?

A lot of dynamics going on.

With respect to this.

But.

That's what my expectation is right now and hope to do better.

Yes.

That's what the expectation is right now.

Fair enough. And then just on the on the credit side of things, you know, as you're looking at out, you know, we talked about the uncertainty and different dynamics in the world right now.

Okay Fair enough and then just on the on the credit side of things as Youre looking out you know we talked about the uncertainty in different dynamics in the world right now.

you know and i know the expectation for loan production for second quarter quarters solid beyond third quarter you know

And I know the expectation for loan production for second quarter third quarter is solid.

Beyond third quarter.

No.

Visibility looks a little dimmer for the whole universe, or the whole bank industry. So how are you thinking of any risk areas that you'd wanna avoid, or maybe avoid new production in, or?

Visibility looks a little dimmer for the whole.

The whole universe or the whole the whole bank industry. So how are you thinking of any.

Any risk areas that you'd want to avoid or you know.

Maybe avoid new production in or anything along those lines.

Well in <unk>.

Well, you know, in terms of particular asset classes that we, you know, we have concern about, you know, certainly office, something that we're

A particular asset classes that we are concerned about certainly office.

It's something that we're shying away from.

You know, we focus on sponsorship and the character of our borrowers, and we get to know them fairly well, like all the verticals we're in. But I was just...

We focus we focus on the sponsorship and the character of our borrowers when we get to know them fairly well.

Like all the verticals we're in.

But if I was to single out something.

office. You also have to be careful from an ag perspective. You know water carries a huge issue.

It is office.

You also have to be careful from an AG perspective water.

Gary is a huge issue now it's always been an issue, but it's a really big issue now in California, and you've got to be careful about folks that are.

It's always been an issue, but it's a really big issue now in California. And you got to be careful about folks that, uh,

that are financing, I'm going to say, orchard development loans, you have to really assure yourself about the long-term viability of their water sources, whether they have district water or ground water.

They are.

Financing.

Orchard development loans.

You have to really assure yourself about the long term viability of their of their water sources, whether they have district water or groundwater.

So that's something that we're gonna be extremely careful about also.

So that's something that we're going to be extremely careful about also.

Yes.

Financing.

homes, subdivisions and whatnot, something that we're also gonna be extremely careful about. It's just a.

Homes.

Subdivisions and what not something that were also kind of going to be extremely careful about.

It's just.

You don't know the impact of rising rates in the mortgage market, what that's going to really kind of pull through to people's ability to buy a home.

You don't know.

The impact of rising rates in the mortgage market, what that's going to really kind of pull through too.

People's ability to buy a home.

Um, you know, if you're looking at 30 year mortgages, you know,

Youre looking at 30 year mortgages.

mid-fours, pushing fives, that has a substantial impact on people's ability to pay.

Mid fours pushing fives.

That has a substantial impact on people's ability to pay.

So, we think that that's going to kind of maybe cool some of the single family development.

So we think that that's going to kind of maybe cool some of the single family development.

People still need a place to live, so we're still, still

People still need a place to live.

So we're still.

So bullish on apartments.

But those are some of the dynamics as we think as we move forward.

It's difficult to predict the impact of inflation and interest rates on the small business community, but it's something that we have to be very keenly aware of in making sure that our customers are in the best possible situations they can be. Small business credit is something that is certainly, I'm not going to say it's the best thing in the world, but it's something that we have to be very keenly aware of. I'm not going to say it's the best thing in the world, but it's something that we have to be very keenly aware of.

It's difficult to predict the impact of inflation.

And interest rates on the small business community.

But it's something that we have to be very keenly aware of and.

And making sure that our customers are.

Best possible situations. They can be so small business credit is something that.

Certainly.

I'm not going to say at risk, but certainly we're concerned about it.

If I could ask one more follow-up, James, and I appreciate the color, you know, as you talk about small business and just broadly, you know, kind of loans where

If I could ask one more follow up James and I appreciate the color.

As you've talked about small business and just broadly kind of loans.

Loans were.

where rates and coupons are going to go up, as was said.

We're rates and coupons, you're gonna go up as the fed tightens.

Have you sensitized the portfolio to any degree in terms of, you know, 250, 300 basis points, higher rates, and, you know, what's your comfort level there?

Have you sensitized the portfolio to any degree in terms of.

200, 5200 basis points higher rates in.

What's your comfort level there.

Well.

We're predominantly a CRE lender so.

So, we like that collateral position.

We liked that collateral position.

And you know our CNI book is with some really good names So we're pretty comfortable with that. There is exposure in our SBA book. We've got 46 million of on our books right now

And our C&I book is with some really good names.

So we're pretty comfortable with that there is exposure in our SBA book, we've got $46 million.

On our books right now.

the non-guaranteed portion of an SBA loan, we feel like we're very well-reserved against them. We are north of 10 points against the portfolio. So that is something that we're keenly aware of, that those borrowers are going to be sensitive to rates.

The non guaranteed.

A portion of an SBA loan.

We feel like we're very well reserved against that.

North of 10 points against the portfolio.

So that is something that we're keenly aware.

Where are they.

As for the.

Those borrowers going to be sensitive to rate moves.

Not just don't want their own business, but the fact that there.

uh... not just in on their own business but the fact that they're what they have to pay to service their debts going up

What they would have to pay to service their debts going up.

you know, every quarter. So we look at that all the time. We've got a lot of eyes on that portfolio, and we're very

Every quarter so.

We look at that all the time, we've got a lot of eyes on that portfolio.

And we're very quick to act with respect to it.

to it. So we feel like we've got good risk management practices associated with it.

So we feel like we've got good risk management practices associated with it.

Thank you.

And the next question is a follow up question from Andrew <unk> with Stephens. Please go ahead.

And the next question is a follow-up question from Andrew Terrell with Stevens. Please go ahead. Hey, thanks for taking

Hey, Thanks for taking the follow up.

Heather I quickly wanted to ask I think.

Heather, I quickly wanted to ask, I think you, if I remember correctly, started running parallel CECL, maybe this quarter, or start of the year. Just curious, any kind of preliminary results you could share with that? Is it, is what the model kind of suggests pretty comparable to where you guys are holding the reserve at?

If I remember correctly started running parallel seasonal maybe this quarter to start the year I was just curious any kind of preliminary results you can share with that is it.

That's what the model kind of suggest pretty comparable to where you guys are holding the reserve today.

You know, we did start our parallel. We're still doing a fine tuning of the qualitative factor assumptions and forecasts. So, you know, we came in slightly above. I don't have a solid rate yet to provide, but I will have a better figure to provide in the Q2 call. But we did run parallel, and overall,

We did start our parallel we're still doing a fine tuning of the qualitative factor assumptions and forecast. So we came in slightly above I don't have a solid rate yet to provide but I will have a better figure to provide in the.

Q2 call, but we did run parallel and overall.

Thank you.

I feel like it was a successful first run, just to get it under our belts, but once we understand the model a little better and understand the assumptions, we'll be able to provide a little bit more guidance on that.

I don't feel like it was a successful first Ryan just to get it under our about once we understand the model a little better and understand the assumptions, we'll be able to provide a little bit more guidance on that.

OK, perfect and then also just on tax rate around 27% this quarter. Is that kind of fair way to think about it for 2020?

Perfect and then also just on tax rate around 27% this quarter or is that kind of a fair way to think about it.

We're trying to get to that one.

The for Q1, it was slightly lower than what we're anticipating for the full year. So, we're estimating still about 29.3%. So, in the current quarter, we did record our return to provision true up because we finalized our 2021 tax return. So, there was about 250,000 dollars that we recorded as a true up based on that.

For Q1, it was slightly lower than what we're anticipating for the full year. So we're estimating still about 29, 3%. So in the current quarter. We did record our return to provision true up because we finalized our 2021 tax return so there.

There was about $250000 that we recorded as a true up.

Based on that.

Got it okay.

And thanks again for the time.

Okay.

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

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

Great, thank you. Five Star Bancorp is on a continued path of robust organic growth as we execute on all of our strategic initiatives.

Great. Thank you five star Bancorp is on a continued path of robust organic growth as we execute on all of our strategic initiatives.

which is really driven by growing our verticals and the geographies that we're in. Our people, technology, operating efficiencies, conservative underwriting practices, and expense management have also contributed to this success we share with our employees and shareholders.

Which is really driven by growing our verticals and the geographies with that.

That were in our people technology operating efficiencies conservative underwriting practices and expense management also contributed to this success, we share with our employees and shareholders.

At Five Star Bank, we seize opportunities, embrace challenges, and value the intrinsic reward of serving others.

At five Star Bank, we see Barb, we seize opportunities embrace challenges and value the intrinsic reward of serving others. We look forward to speaking with you again in July to discuss earnings for the second quarter.

We look forward to speaking with you again in July to discuss earnings for the second quarter.

2022.

Have a great day and thank you for listening.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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

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Yes.

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