Q2 2022 Five Star Bancorp Earnings Call
Operator: Welcome to the Five Star Bancorp second quarter earnings webcast. Please note, this is a closed 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.
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, events, including the continuing impact of the COVID-19 pandemic and industry trends that may affect the company's future operating results and financial position.
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 may differ materially from these expectations. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from the company's forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2021, and in particular, the information set forth in item 1a risk factors therein.
from the company's 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 1a risk factors therein.
Please refer to slide two of the presentation, which includes disclaimers regarding forward-looking statements, industry data, and non-GAAP financial information included in this presentation as well as a reconciliation 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 being recorded. I would now like to turn the presentation over to James Beckwith, Five Star Bancorp's President and CEO. Please go ahead.
A reconciliation 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 being recorded I would now like to turn the presentation over to James Beck with five Star Bancorp President and.
CEO . Please go ahead.
James Beckwith: Thank you for joining us to review Five Star Bancorp's financial results for the second quarter of 2022. Joining me here today is Heather Luck, Senior Vice President, and Chief Financial Officer.
Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy of the release, please visit our website at fivestarbank.com and click on the Investor Relations tab. In the company overview section, we have provided a brief overview of our geographic footprint and executive management team.
To obtain a copy of the release. Please visit our website at five Star Bank Dot Com and click on the Investor Relations tab.
And the company overview section, we have provided a brief overview of our geographic footprint and executive management team.
The second quarter of 2022 exhibited 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 prior periods.
And balance sheet trends during the quarter. Additionally, loans and deposits in total assets have consistently grown since the prior periods.
Our pipeline continues to remain substantial at the end of the second quarter of 2022. Within the verticals, we have historically operated in, as presented in the loan portfolio diversification slide. Non-PPP loans held for investment, a non-GAAP measure that is reconciled in our press release, increased during the quarter by $301, 900,000 or 14.52% from the prior quarter, primarily within the commercial real estate concentration of the loan portfolio.
Within the verticals, we have historically operated in as presented in the loan portfolio diversification slide.
Non P. P. P loans held for investment a non-GAAP measure that is reconciled in our press release.
Greece during the quarter by $301 million.
$900000 or $14 five 2% from the prior quarter.
Primarily within the commercial real estate concentration of the loan portfolio.
All PPP loans have been forgiven or paid off by the borrower or charged off as of June 30th, 2022. Loan originations, excluding PPP loans during the quarter were approximately $440.5 million and pay-offs, excluding PPP loans, were $138.1 million. Additionally, $1.5 million of PPP loans were forgiven. Ultimately, resulting in a net increase in loans of $300.4 million from the prior quarter.
Loan originations, excluding PPP loans during the quarter were approximately $445 million and pay offs, excluding PPP loans were $138 1 million.
Additionally, $1 5 million of PPP loans were forgiven.
Ultimately, resulting in a net increase in loans of $304 million from the prior quarter.
Asset quality continues to remain strong with non-performing loans representing 0.02% of the portfolio, slightly decreasing from the last several quarters.
At quarter end, there were two loans totaling $0.1 million in the aggregate on COVID-19 deferment. We anticipate all borrowers to return to their pre-COVID-19 contractual payment status after their COVID-19 performance ends.
We anticipate all borrowers to return to their pre COVID-19 contractual payment status after their COVID-19 performance yes.
Yes.
At the end of the second quarter, the allowance for loan losses totaled $25.8 million. We recorded a $2.3 million provision for loan losses during the quarter primarily related to loan growth. The ratio of the allowance for loan losses to total loans, excluding PPP loans, a non-GAAP measure that is reconciled in our press release, was 1.08 at quarter-end. Loans designated as sub-standard totaled $1.2 million at the end of the quarter, representing a decrease in sub-standard loans of approximately $1.8 million from the previous quarter.
We recorded a $2 3 million provision for loan losses during the quarter primarily related to loan growth.
The ratio of the allowance for loan losses to total loans, excluding PPP loans.
non-GAAP measure that is reconciled in our press release was 1.08 at quarter end.
Loans designated as sub standard totaled $1 2 million at the end of the quarter, representing a decrease in.
In sub standard loans of approximately $1 8 million from the previous quarter.
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?
And the results of operations Heather.
Heather Luck: Thank you, James, and hello, everyone. During the second quarter, deposits decreased slightly by $1.8 million or 0.07% as compared to the previous quarter.
During the second quarter deposits decreased slightly by one $8 million or 7%.
As compared to the previous quarter.
Non-interest bearing deposits as a percent of total deposits at the end of the second quarter increased to 40.2% from 37.6% at the end of the previous quarter.
We've had strong deposit growth over the last several quarters with deposit balances remaining relatively consistent from the prior quarter.
Non-interest-bearing deposits increased by $64.8 million, while interest-bearing deposits decreased by $66.6 million. Cost of total deposits was 17 basis points during the second quarter. We continue to be well capitalized with all capital ratios well above regulatory thresholds for the quarter.
$6 million.
Cost of total deposits was 17 basis points during the second quarter.
We.
<unk> to be well capitalized with all capital ratios well above regulatory thresholds for the quarter.
Net income for the quarter was 10 million, return on average assets was 1.45%, and the return on average equity was 17.2%. New loan originations drove increases in the daily average balance of loans period over period. Additionally, the company recognized $24,000 of PPP income, recognized based on forgiven loans during the quarter.
Return on average equity was 17, 2%.
New loan originations drove increases in the daily average balance of loans period over period.
Additionally, the company recognized $24000 of PPP income.
Recognize based on for Kevin month during the quarter.
Average loan yield for the quarter was 4.47%, representing a decrease of six basis points over the prior quarter. As a result of these factors, our net interest margin was 3.7% for the quarter, while net interest margin for the prior quarter was 3.6%, which also included $600,000 of PPP income recognized based on forgiven loans.
As a result of these factors our net interest margin was three 7% for the quarter, while net interest margin for the prior quarter was three 6%, which also included $600000 of PPP income recognized based on for Kevin.
<unk>.
Yeah.
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 $5.5 million, primarily in our mortgage-backed and municipal securities portfolio resulting in decreases to each of those portfolios of $7.3 million and $5.2 million respectively.
Primarily in our mortgage backed and municipal securities portfolio.
Resulting in decreases to each of those portfolios of $7 3 million and $5 2 million respectively.
This caused a decline in tangible book value per share, which is a non-GAAP financial measure discussed in our press release. This decline was offset by increases to tangible book value per share due to a slight increase in equity as a result of net income earned in the quarter, paired with the decline in total shares outstanding at the end of the period as a result of various stock forfeitures that occurred during the quarter. This resulted in a net increase in tangible book value per share of 12 cents.
This decline was offset by increases to tangible book value per share due to a slight increase in equity as a result of net income earned in the quarter.
Paired with the decline in total shares outstanding at the end of the period as a result of various stock forfeitures that occurred during the quarter.
This resulted in a net increase in tangible book value per share of 12%.
Non-interest income decreased to $2 million in the second quarter from $2.2 million in the previous quarter, due primarily to a decrease in other income as a result of a $300,000 gain recorded on a distribution received on an investment in a venture-backed fund in the prior quarter, which did not recur during the current quarter. This decrease was partially offset by an increase in loan-related fees of $200,000 due to an increase in swap referral fees recognized during the quarter.
Due primarily to a decrease in other income as a result of a $300000 gain recorded on a distribution received on an investment in a venture backed fund in the prior quarter, which did not recur during the current quarter.
This decrease was partially offset by an increase in loan related fees of $200000 due to an increase in swap referral fees recognized during the quarter.
Non-interest expenses increased to $10.2 million in the second quarter from $9.6 million in the previous quarter, driven largely by an increase in other operating expenses as a result of an increase in travel-related attendance of professional events, conferences, and other business-related travel during the quarter.
Driven largely by an increase in other operating expenses as a result of an increase in travel related to attendance of professional events conferences and other business related travel during the quarter.
Now that we have discussed the overall results of operations, I will now hand it back to James to provide some closing remarks.
James Beckwith: Thank you, Heather. I want to thank everyone for joining us today as we discuss the second quarter results. The strength of the bank's second quarter financial results continue to be emblematic of a reputation built on trust, speed to serve, and certainty of execution, which supports our clients' success.
Want to thank everyone for joining us today as we discuss the second quarter results.
The strength of the bank's second quarter financial results continues to be emblematic of a reputation built on trust speed to serve and certainty of execution, which supports our clients' success.
Our financial results are also a result of truly differentiated customer experience, which powers the demand for Five Star Bank's relationship-based services. We are pleased to have recently received a super premier rating from the Finley reports and an IDC rating of superior.
We are pleased to have recently received a super Premier rating from the Finley reports.
And IDC rating of superior. Additionally.
Additionally, the company's Bower rating is a five-star rating. We attribute these ratings to our prudent business model and treating customers with an empathetic experience, understanding, and care. We are very proud to have earned the trust of those we serve including our shareholders.
We attribute these ratings to our prudent business model and treating customers with an empathetic experience.
Understanding and care we.
We are very proud to have earned the trust of those we serve including our shareholders.
Looking to the second half of 2022, we will be guided by our continued focus on shareholder value as we monitor market conditions. We are confident the company's resilience in any interest rate environment and we will continue to execute our organic growth strategy and disciplined business practices, which we believe will benefit our customers, employees, community, and shareholders.
We are confident the company's resilience in any interest rate environment.
And we will continue to execute our organic growth strategy and disciplined business practices, which we believe will benefit our customers employees community and shareholders.
We appreciate your time today. This concludes today's presentation. Now Heather and I will be happy to take any questions that you might have.
Now Heather and I will be happy to take any questions that you might have.
Yeah.
Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.
Daily to assemble our roster.
Our first question comes from Andrew Terrell with Stephens. Please go ahead with your question.
Andrew Terrell: Hey, good morning.
Multiple speakers: [James Beckwith] Good morning, Andrew. [Heather Luck] Good morning.
Andrew Terrell: James, maybe just to start, this was just an exceptional growth quarter. I was hoping you could discuss maybe how the pipeline or give us a sense of where the pipeline in the third quarter was shaping up versus the prior quarter. Are you seeing any kind of a slowdown given kind of the move up in rates we've seen? And then I would assume also on the other end payoffs are slowing down as well. So hopefully you can just provide us kind of updated expectations on how overall net loan growth shapes up in the second half of the year.
Why this was just an exceptional growth quarter.
I was hoping you could discuss maybe how the pipeline or give us a sense of where the pipeline in the third quarter was shaping up versus the prior quarter.
Are you seeing any kind of a slowdown given kind of the move up in rates. We've seen and then I would assume also on the other end payoffs are slowing down as well. So hopefully you can just provide us kind of updated expectations on how overall net growth shapes up now loan growth shapes up in the second half of the year.
James Beckwith: Sure. Our loan pipeline is less than what it was when we entered into the second quarter by a fair amount. Our deposit pipeline has actually grown. So where we sit today is that our deposit pipeline is substantially larger than our loan pipeline. I think it's safe to say it would be very difficult for us to experience the same amount of loan growth in the second half of the year as we saw in the first half. The deal flow has slowed but it's still there. We're still very busy but I don't think we're going to experience the same degree of loan growth that we saw in the first half of the year and in particular the second quarter for Qs three and four as we go out. So expectations are probably a 5% to 10% loan growth for the remaining of the year and probably if we perform well on the deposit side, a deposit growth between 10% to 15% for the remainder of the year. We have a lot of large relationships that we're onboarding right now and we're excited about those opportunities and everything else that the market is bringing us right now.
Our loan pipeline is.
Less than what it was when we entered into the second quarter.
By a fair amount.
Our deposit pipeline has actually grown.
So where we sit today is that our deposit pipeline is substantially larger than our loan pipeline.
I think it's safe to say it would be very difficult for us to.
<unk> the same amount of loan growth in the second half of the year as we saw in the first half.
The deal flow has slowed.
But it's still there.
Still very busy.
But I don't think we're going to experience. The same degree of loan growth that we that we saw in the first half of the year and in particular the second quarter.
for Qs three and four as we go out. So expectations are probably a 5% to 10% loan growth for the remaining of the year and probably if we perform well on the deposit side, a deposit growth between 10% to 15% for the remainder of the year. We have a lot of large relationships that we're onboarding right now and we're excited about those opportunities and everything else that the market is bringing us right now.
If we perform well on the deposit side.
Deposit growth between 10% to 15% for the remainder of the year, we have a lot of large relationships that we're onboarding right now.
We're excited about those opportunities and and and.
Everything else that the market is bringing us right now.
Andrew Terrell: Great. That's really encouraging to hear especially on the deposit growth front. I think last quarter, we might have talked about loan yields I think potentially laying down a bit for the next couple of quarters, just before expanding as a function of kind of the pipeline funding up. I was just hoping to get a sense of where new originations came on during the second quarter. And then I would imagine just given the volatility in rates upward that we've seen that you're kind of funding loan growth at a higher yield now. Just hoping to get a sense of kind of the trajectory of the loan yields.
<unk> to hear especially on the deposit growth front.
<unk>.
I think last quarter, we might have talked about loan yields I think potentially laying down a bit for.
Next couple of quarters, just before expanding.
A function of kind of the pipeline funding up I was just hoping to get a sense of where new originations came on at during the second quarter.
And then I would imagine just given the volatility in rates upward that we've seen that in your kind of funding loan growth at a higher yield now.
Just hoping to get a sense of kind of trajectory of the loan yields.
Heather Luck: Yes, I can take that Andrew. For Q2, our weighted average rate was about 4.65%, and then driving that primarily with our fundings in the multifamily concentration which came in about 4.57% that was pretty much the bulk of the funding for the period. I'm not sure if James has any color to add.
For Q2, we are weighted average rate was about $4 six 5%.
And then.
Driving that primarily with our fundings in the multifamily concentration which came in about 457% that was pretty much there.
The bulk of the funding for the period outlet James for sure.
The loans that were approving and committee over the last month or.
James Beckwith: Sure. The loans that we're approving in the committee over the last month substantially all of which had five handles on it. So we are pricing up, naturally speaking, we are a spread shop and we spread off the five-year of the tenure with our re-lending and so we are seeing the actual rates on those deals being higher than our loan yield that we currently have in our loan portfolio. So it's our expectations that loan yields will grow and based upon the amount of volume that we put on which is nice to see. For the longest period of time, Andrew we were making loans that in terms of yields were less than what was in the portfolio, which it's not a winning strategy per se, but we think that that's turned around.
Substantially all of which had five handles on it. So we are we are pricing.
Naturally speaking, where our spread shop.
And.
We spread off the five year tenure with our CRE lending and so we are seeing.
The actual rates on those deals being higher than our loan yield.
We currently have in our loan portfolio. So it's our expectations that loan yields will grow.
And based upon the amount of volume that we put on so.
Which is nice to see.
For the longest period of time, Andrew we were making loans that were less in terms of yields were less than what was in the portfolio, which.
It's not a winning strategy.
Per se, but.
We think that that's turned around.
Yes.
Andrew Terrell: Okay, got it. Maybe thinking on kind of the margin, if I look at the move in the interest-bearing deposit cost this quarter, I guess, if I just run the math, I get to like a 20% interest-bearing deposit beta for Q2. Maybe for Heather, do you think that beta should kind of hold around 20% through the rate cycle or are you seeing deposit rate competition kind of more meaningfully accelerate so far in the third quarter, and then can you just remind us overall where you kind of target the deposit beta through the cycle?
Maybe thinking on kind of the margin.
If I look at the mood.
The move in the interest bearing deposit cost this quarter I guess, if I just run the math I get to like a 20% interest bearing deposit beta for Q.
Maybe for Heather do you think that beta should kind of hold around 20% through the rate cycle or are you seeing deposit rate competition in kind of more meaningfully accelerates. So far in the third quarter and then can you just remind us overall and where are you where you kind of target the deposit beta through the cycle.
Heather Luck: Sure, so we actually use an internal estimate of about 30% for our betas on deposits. We do have our large governmental book that kind of holds that steady as we have inflows and outflows. So we're kind of using 30% as our estimate.
30%.
For our betas on deposits, we do have our large governmental book that kind of hold that steady as we have inflows and outflows.
So we're kind of using 30% is our estimate.
Andrew Terrell: Got it. Okay, and then do you have the spot either interest-bearing or total deposit cost on June 30th?
June 30th.
Heather Luck: Well, total cost of deposits on June 30th was 22 basis points, but we can kind of see that almost doubling by the end of September just given the composition of our deposit book, the rising rates on the lease rate that we tie our governmental book too. So all in that could go up to 44 to 50 basis points by the end of Q3.
But we can kind of see that almost doubling by the end of September just given given the composition of our deposit book the rising rates on the lease rate that we tie our governmental back too. So all in that could go up to 44 to 50 basis points by the end of Q3.
And I think it's important to note.
Because of the fact that we don't have.
A very granular.
Deposit base per say, we've got a lot of large relationships.
Each each one of those relationships.
And I think it's important to note because of the fact that we don't have a very granular deposit base per say, we've got a lot of large relationships, each one of those relationships have negotiated pricing. And so it's difficult to kind of across the board to determine where that's going to end up. We're responsive from a pricing perspective and I think that with each Fed move there's more pressure with respect to some of our interest-bearing deposits to move up, but each relationship stands on its own in terms of the negotiated pricing associated with it.
<unk> pricing.
And so you could.
So it's difficult to kind of across the board.
Determine where that's going to end up where responsive.
From a pricing perspective.
And I think that with each fed move theres more pressure.
With respect to <unk>.
Some of our interest bearing debt.
Posits to move up but.
But each relationship stands on its own in terms of.
The negotiated pricing associated with it.
Andrew Terrell: Okay, understood. Well, I'll step back in the queue, I appreciate you taking my questions.
Understood well I'll step back in the queue I appreciate you taking my questions.
James Beckwith: Sure.
Operator: Our next question comes from Gary Tenner with D.A Davidson. Please go ahead with your question.
Gary Tenner: Thanks, good morning, everybody.
James Beckwith: Hey, Gary.
Gary Tenner: Hey, I appreciate the thoughts on the deposit pipeline, obviously, with the loan deposit ratio creeping up as it did during the quarter, it should help moderate it a bit. Could you give us a sense as to kind of what the rate of that deposit pipeline looks like? I know Heather you just provided some thoughts on where deposits could go by the end of the quarter, but just curious kind of what the marginal cost of funding looks like.
It should help moderated a bit could you give us a sense as to.
What the.
The rate of that deposit pipeline looks like I know Heather you just provided some thoughts on where deposits could go by the end of the quarter, but just curious kind of what the marginal cost of funding looks like.
James Beckwith: So a lot of commercial accounts, so if I was to blend it, it's probably maybe at or slightly above where we are right now at the end of the second quarter. I think that that would be new production per se. We expect to continue to grow our non-interest-bearing deposits. Gary, you can see a pretty substantial increase in the first half of the year, 30th of June over $100 million in non-interest bearing deposits, so that has a tendency to kind of drive down obviously, your cost and our pipeline is replete with those types of opportunities as we continue to take advantage of folks in the market, in particular, the majors and the other I'm going to say merger-related entities for merger-affected entities, which has been kind of a nice little windfall for us.
So a lot of commercial accounts.
So if I was to blended it's probably maybe at or slightly above.
Where we are right now at the end of the second quarter.
I think that that would be new production per se.
We expect to continue to grow our noninterest bearing deposits Gary you can see a pretty substantial increase in the first half of the year.
Yes.
330 June over $100 million.
Noninterest bearing deposits, so that has a tendency to kind of drive down.
Obviously your cost and our pipeline is replete with those types of opportunities.
As we continue to take advantage of.
Folks in the market in particular, the majors and the other Oh I'm going to say merger related entities for merger affected entities, which which has been kind of a nice little windfall for us.
Gary Tenner: Got it, thank you. On the fee side, obviously, a pretty steep drop that we've seen at your institution and others as it relates to SBA premiums. Any thoughts to kind of keeping more on portfolio given how low those premiums or does balance sheet management and funding dictate that you continue to sell?
On the fee side.
Obviously, a pretty steep drop that we've seen at your institution and others as it relates to SBA premiums.
Any thoughts.
Kind of keeping more on portfolio given how low those premiums are or those balance sheet management and funding dictate that you continue to sell.
James Beckwith: Well, that's a great question. We've never port folioed any SBA loans, we've always sort of originated for sale and I suspect we're going to continue to do that. There are some things going on in SBA that's of note. SBA is moving up their max pricing, if you will, pretty substantially frankly and we're not in a position to determine what do we want to do yet. I think it's a wait-and-see with respect to the investors and the folks who buy our loans. What do they make about those pricing increases which are [inaudible] 50 basis points to 100 basis points higher than what the max pricing SBA allowed. I'm not sure about the policy behind it but nevertheless, it's going to be in place I think in the first week of August. So that could affect premiums, we just don't know what that looks like right now. Premiums have drifted down as you've noted. Our SBA function is still very profitable and the volumes, we wish they were a little higher but they are what they are so we will continue to sell.
We're going to continue to do that there is some things going on in SBA that's of note.
SBA is moving up their Max pricing, if you will.
Pretty substantially frankly.
And we're not in a position to determine what do we want to do yet I think it's a wait and see with respect what the investors the folks who buy our loans.
What are they going to what do they make about those pricing increases.
But you are right.
50 basis points to 100 basis points higher than what the Max pricing.
SBA allowed.
I'm not sure about the policy behind it.
But.
Nevertheless, it's going to be in place I think in the first week of August .
So that could affect premiums, we just don't know what that looks like right now with premiums have drifted down as you've noted.
We're still our SBA function is still very profitable.
<unk>.
The volumes are we wish they were a little higher but they are what they are.
So we will continue to sell.
Gary Tenner: Great. And then lastly for me, I think historically your program set up to where as your business development officers kind of hit their numbers you have that ramp of comp in the back half of the year and I think particularly with your thoughts on the pipeline, which I know is a big part of that incentive program, should we expect to see sort of that upward trajectory again in the back half of this year based on how that pipeline looks?
Graeme shall.
Should we expect to see sort of that upward trajectory again in the back half of this year based on how that pipeline looks.
James Beckwith: Well, I think we do have some specialists and incentives for deposits. With the loan production in the first half of the year was three-quarters of a billion dollars so a lot of guys are already at their highest tier. I'm going to say at least half of them are. So Q2 commissions were pretty good for them. We're happy to be able to do that but I think that you probably can see some maybe slightly less consistent with last year in terms of commission growth, but it all depends on how well we execute on the deposit side in terms of new accounts and new relationships.
I think we do have some specialists and incentives for deposits.
With the loan production in the first half of the year was three quarters of a $1 billion. So a lot of guys are already at.
At the highest here.
I'm going to say at least half of them are in.
So.
Q2 commissions were pretty good.
For them, we're happy to be able to do that but I think that you probably can see some.
Maybe slightly slightly less consistent with last year in terms of commission growth.
But.
It all depends on how well we execute on the deposit side in terms of.
New accounts and new relationships.
Gary Tenner: Okay, thanks for taking my questions.
Operator: Our next question comes from Stuart Lotz with KBW. Please go ahead with your question.
Stuart Lotz: Hey, guys. Good morning, how is it going?
Multiple speakers: [James Beckwith] Good morning, how are you doing? [Heather Luck] Good morning.
Stuart Lotz: I was hoping you could kind of quantify the--sorry, James, quantify your loan growth outlook. I appreciate the pull back just given the backdrop but this quarter 300 million and I think over the last about four quarters you've averaged above a 30% annualized growth. So just in terms of dollar amounts, how are you thinking about the growth pipeline for the back half?
Hi, there I was hoping you could kind of quantify the or sorry, James quantify your loan growth outlook.
I appreciate that pulled back just given the backdrop.
This quarter 300 million and I think over the last about four quarters.
Average above a 30% annualized growth. So just in terms of dollar amounts how are you thinking about the growth pipeline for the back half.
James Beckwith: Probably in the neighborhood of 100 to 125 per quarter for the remainder of the year. Is that helpful?
Oh.
Probably in the neighborhood of 100 to 125 per quarter.
Remainder of the year.
Is that helpful.
Stuart Lotz: Yes. And I mean, just given the mix in recent quarters has really come from the manufacturer housing book or manufactured home book, can we expect that to continue to drive the growth from here or do you anticipate pulling back just given the concentration issues?
And I mean.
Just given the mix in recent quarters has really come from the manufacturer housing book or manufactured home book.
Can we expect.
Debt to continue to drive the growth from here or do you anticipate.
Pulling back just given concentration of concentration issues.
James Beckwith: We don't anticipate pulling back in terms of that particular vertical and lending into that space. We really like the credit characteristics, we like the geographic granularity associated with that business, and we just think that that asset class, based upon our research, has always performed well in any type of economic environment and in particular, a downturn. So we think that we're well protected in terms of lending into that space. So we don't plan to stop or modify what we're doing but we'll say that the market has slowed. I think there is less park acquisition going on. I think rates have clicked up so buyer and seller expectations are maybe they're a little wider spread than they once were with cap rates rising. So we've definitely seen a slowdown in that business, but it's still pretty decent.
Yeah.
We don't anticipate pulling back in terms of that particular vertical and lending into that space, we really like the credit characteristics, we like the granularity geographic granularity.
Associated with that business.
And we just think that that asset class.
Based upon our research has always performed well in any type of economic environment and in particular, a downturn. So we think that we're well protected in terms of lending into that space. So we don't plan to.
Stop or modify what we're doing but we'll see.
We'll say that.
The market has slowed I think there is less.
Acquisition Park acquisition going on.
I think rates have clicked up so.
So a buyer and seller expectations are.
Maybe they're a little wider spread than they once were with cap rates rising.
We've definitely seen a slowdown in that business, but it's still pretty decent.
Stuart Lotz: Okay, got it. Great and maybe a capital question, I think historically you've operated with the CRE as high as about 700% of total risk-based capital and kind of by my math, this quarter you guys are kind of back in that range. So any thoughts about potential capital? I know you are looking at potential sub-debt raise at some point to reprice existing sub-debt, but I just want to get your thoughts on how high you're willing to let that ratio go before looking to raise some additional capital for growth.
Okay got it.
Great and maybe what bringing a capital question.
I think historically you've operated with CRE.
As high as about 700%.
Total risk based capital and kind of by my math. This quarter you guys are kind of back in that range.
Any thoughts about.
Potential capital I know you are looking at potential sub debt raise at some point to reprice.
Existing sub debt, but.
I just wanted to get your thoughts on that.
How high Youre willing to let that.
Our ratio go before looking to raise some.
Additional capital for growth.
James Beckwith: Well, Stuart as you know that we've always talked about us executing on that refinance and I think that our thinking is consistent with respect to that. So, I think that there should be or could be an expectation that we would execute on that by the end of the year, and if we do it, that could provide us with additional capital into the bank and lower those concentration levels for CRE that you just referenced.
Stuart as you know that we've always talked about us.
Executing on that.
Refinance and.
I think that.
We're thinking is consistent with respect to that so.
I think that.
There should be or could be an expectation that we would execute on that by the end of the year, So and that could provide us if we do it.
That could provide us with additional capital into the bank.
And lower those.
Those concentration levels for CRE that you just referenced.
Stuart Lotz: And would you potentially look at just given the strength of the currency right now, raising equity capital just given how high kind of sub-debt pricing is today and maybe what would kind of drive one or the other from here?
Equity capital, just given how high kind of sub debt pricing.
Is today and.
Maybe what would.
Kind of driver.
For one or the other from here.
James Beckwith: Well, that's a good question so, let's do the math together if we could. We're nowhere near 125 double leverage ratio right now. We kind of like that number is a ceiling Stuart, you could probably back into that in terms of what additional [inaudible] would be if we did a sub-debt deal number one. If we're making 17% after a $2.3 million provision on equity, I think that my understanding of the current sub-debt market in terms of an interest rate we'd do pretty well at that don't you think?
That's a good question so, let's let's do the math together if we could.
We.
We're nowhere near 125 double leverage ratio right now, we kind of like that number is a ceiling.
So okay, you could probably back into that in terms of what additional work.
<unk> would be if we did a sub debt deal number one.
If we're making 17% after a $2 3 million provision on equity. I think that. My understanding of the current sub debt market in terms of an interest rate. We do pretty well at that don't you think.
I think that.
My understanding of the current sub debt market in terms of an interest rate.
We do pretty well at that don't you think.
Stuart Lotz: I would agree. Yes, just given kind of what we've seen, obviously, there's been a pullback in that market but just given the strength of your currency from a price intangible book standpoint, I feel like common equity might make sense at these levels too.
I would agree.
Yes, I've just given.
You know kind of what we've seen.
Obviously, there's been a pullback in that market.
But just given the strength.
Of your.
Currency from a price intangible book standpoint, I feel like common equity.
Makes sense at these levels too.
James Beckwith: Sure. We want to make sure that we don't have our blinders on with respect to capital at all. We want to make sure that we comprehend any opportunity that might be out there in the marketplace. We are trading at I think a pretty nice premium to book, which not everybody enjoys. So definitely hear you when you say our valuations are favorable with respect to future equity rates.
We.
We want to make sure that we don't our blinders on with respect to capital at all we want to make sure that we comprehend any opportunity that might be out there.
And the marketplace, we are trading at a I think a pretty.
Nice premium to book.
Which not everybody enjoys.
So definitely hear you when you say.
Our valuations are.
Favorable with respect to future equity raises.
Stuart Lotz: I appreciate all your color there. Maybe one more for Heather and then I'll turn it back. Do you have what the deferred loan origination costs were this quarter and maybe if you could kind of hone in on a run rate for what you think the third quarter expense base could be?
Color there, maybe one more for Heather. Back to expenses do you have what the deferred loan origination costs were this quarter and maybe if you could kind of hone in on a run rate for what you think the third quarter expense base could be.
Back to expenses do you have what the deferred loan origination costs were this quarter and maybe if you could kind of hone in on a run rate for what you think the third quarter expense base could be.
Multiple speakers: [Heather Luck] Let me pull up that. Did we break that out in the earnings release for you all? I believe we did. [Stuart Lotz] I may have missed that. [Heather Luck] Actually, let me get back to you on that one, you can hop out and then hop back in.
Let me pull up that.
I don't think we did we break that out in the earnings release for you all.
I believe we did you may have missed that.
Yeah.
Thanks, Paul asked me one moment.
Yeah.
Okay.
Actually let me, let me get back to you on that one we can happen hop outlook and then I'll hop back in that program.
Stuart Lotz: Okay, great. Alright, thanks for taking my questions.
Operator: Our next question comes from Andrew Terrell with Stephens. Please go ahead with your question.
Our next question comes from Andrew Carrol with Stephens. Please go ahead with your question.
Andrew Terrell: Hey, thanks for the follow-up. James, I wanted to ask you, I think you alluded to it maybe a little bit in some of your prepared remarks, but I know part of the organic growth story has been driven by just your success and your ability and hiring talent away from other institutions, just was hoping to get an update on any kind of progress made over the past quarter in terms of new business development hires and then what the pipeline for that specifically looks like going forward.
James I wanted to ask you.
<unk> alluded to it maybe a little bit on some of your prepared remarks, but I know <unk>.
Part of the organic growth story has been driven by just your success and your ability and hiring talent away from.
From other institutions, just was hoping to get an update on any kind of progress made over the past quarter in terms of.
New business development hires and then what the pipeline for that that specifically it looks like going forward.
James Beckwith: Well, right now, as we sit here, we have our eye on a few people but there is no one, somebody who is actively in the queue at this point. We have a pretty complete business development team that is doing a great job. We've had the opportunity to build out a couple of our verticals with additional hires this year, whether it's in our faith-based business or venture banking business and also our AG business. So we feel like we've got a pretty strong complement right now. We usually like to have Andrew two to Biz Dev people in each vertical, one in each substantial vertical and I think that we certainly have that and we're doing quite well even in our practice group, we've got fundamentally two and a half people in there now, so we're seeing a lot of growth come through that particular business. And I'm talking about the dentistry, the veterinary clinics, and whatnot, to some extent CPA practices. So we kind of like where we are right now. That's not to say if it came to past that we have an opportunity to land somebody we wouldn't jump all over it but right now where we are we think we're very strong from a business development perspective. So to answer your question, we don't have anybody in the queue right now.
Well right now as we sit here there is nobody that.
We have our eye on a few people that theres no somebody who is actively in the queue at this point.
We have a pretty complete.
Our business development team is doing a great job, we've had the opportunity to build out a couple of our verticals with additional hires this year, whether it's in our faith based business our venture banking business.
And also our AG business so were.
We feel like we've got a pretty strong complement right now while we usually like to have Andrew two to Biz Dev people in each vertical we're in each substantial vertical and I think that we certainly have that and we're doing quite well even in our practice group.
We've got a fundamentally two and a half people in there now so we're seeing a lot of growth come through that particular business and I'm talking about the dentistry.
The veterinary clinics and whatnot.
Some extent CPA practices. So that's.
So we kind of like where we are right now that's not to say we wouldn't.
If it came to past that we have to have an opportunity to Atlanta somebody we wouldn't jump all over it but.
Right now.
Where we are we think we're very strong in.
And from a business development perspective.
So to answer your question, we don't we don't really we're not looking to.
We don't have anybody in the queue right now.
Andrew Terrell: Okay, that's really helpful. I appreciate the color. And then the last one for Heather, looking at the reserve ratio, it ticked down a little bit this quarter, just given the strong loan growth. I know you're running seasonal parallel right now. I'm curious if you had any kind of preliminary day one seasonal estimate you were able to share with us.
It's really helpful. I appreciate the color and then last one for Heather.
Looking at the reserve ratio it ticked down a little bit this quarter, just given the strong <unk>.
Loan growth.
No youre running seasonal parallel right now.
Curious if you had any kind of.
Preliminary day, one seasonal estimate.
You were able to share with us.
Heather Luck: Yeah, so at this moment, we don't have a preliminary day-one estimate. We did do our first parallel run as of June 30, but we are still working through our qualitative factors. This is definitely a learning experience for all of us navigating seasonal adoption for our first early adopters and we're finding our quantitative side is coming out rather high and so we need to make sure that we're looking at our underwriting practices and our experienced management and what we're doing and how to adjust for those qualitative factors to make sure that we have an appropriate reserve. Hopefully in Q3, we'll be able to provide at least an estimate so that you all can start looking as we get closer to the end of the year.
But we are still working through our qualitative factors. This is definitely.
Turning experience for all of us navigating seasonal adoption for our first early adopters and we're finding our quant quantitative side is coming out rather high and so we need to make sure that where we're looking at our underwriting practices and our experienced management and what we're doing and how to adjust for those.
Qualitative factor to make sure that we have an appropriate reserve.
Hopefully in Q3, we'll be able to provide at least an estimate so that not only you all can start.
Looking as we get closer to the end of the year.
Andrew Terrell: Okay, perfect. Thanks for the follow-up question.
Perfect. Thanks for the follow up questions.
Okay.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to James Beckwith for any closing remarks.
James Beckwith: Great, thank you. Five Star Bank Corp is on a continued path of robust organic growth as we execute on our strategic initiatives, which include growing our verticals and geographies while attracting and retaining talent. Our people, technology, operating efficiencies, conservative underwriting practices, and expense management have also contributed to the success we share with our employees and shareholders.
And geographies, while attracting and retaining talent our people technology operating efficiencies conservative underwriting practices and expense management have also contributed to the success, we share with our employees and shareholders.
At Five Star Bank Corp, we seize opportunities, embrace challenges, and value the intrinsic reward of serving others. We look forward to speaking with you again in October to discuss earnings for the third quarter of 2022. Have a great day and thank you for listening.
Have a great day and thank you for listening.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.