Q2 2023 Five Star Bancorp Earnings Call

By our earnings expense management and balance sheet trends during the quarter.

Additionally, loans deposits and total assets have consistently grown since the prior periods.

Our pipeline continues to remain solid at the end of the second quarter of 2023.

Within the verticals, we have historically operated in.

As presented in the loan portfolio diversification slide.

Loans held for investment increased during the quarter by $57 6 million or two 1% from the prior quarter.

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

Loan originations during the quarter were approximately $254 4 million in payoffs or $196 8 million.

Asset quality continues to remain strong with nonperforming loans represented only 0.01% of the portfolio.

Remaining largely unchanged from the last several quarters.

At the end of the second quarter, the allowance for credit losses totaled $34 million.

We recorded a $1 3 million provision for credit losses during the quarter.

Primarily related to loan growth.

Loan type mix and updates to the macroeconomic environment.

The ratio of the allowance for credit losses to total loans held for investment was one 6% at quarter end.

Loans designated as substandard totaled approximately <unk> three.

$3 million at the end of the quarter.

Which was a decrease from $4 million at the end of the previous quarter.

Now that we've discussed the loan portfolio we continue.

Now onto deposits and capital.

During the second quarter deposits increased by $9 3 million or three 2% as compared to the previous quarter.

Non interest bearing deposits as a percentage of total deposits at the end of the second quarter decreased slightly to 28, 5% from 28, 6% at the end of the previous quarter.

We will offer more detail on our deposit composition I want to highlight that deposit relationships totaling at least 5 million constituted approximately 60% of total deposits.

And the average age on these accounts was approximately nine years.

Local agency Depositor is accounted for approximately 25% of deposits as of June 32023.

As noted earlier, we are pleased that we had a net deposit inflow for the three months ended June 32023 and.

Including inflows during the month of June .

Our ability to grow deposit accounts supports our differentiated customer centric model that our customers trust and value.

As seen through the mix of high dollar accounts and the duration of certain customer relationships.

Which we believe we have a reliable core deposit base.

Overall deposit balances have increased when compared to the prior quarter.

Non broker deposits increased by $25 million interest bearing deposits increased by $12 3 million and noninterest bearing deposits decreased by $3 million.

The cost of total deposits was 192 basis points during the second quarter.

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

Our common equity tier one ratio increased from nine 2% to nine point, both 7% between March 31, 2023 and June 32023.

On Friday July 21, we.

We announced a declaration by our board of a cash dividend of <unk> 20 per share on the company's voting common stock expected to be paid on August 14th 2023 to shareholders of record as of August seven 2023.

On that note I will hand, it over to Heather to discuss results of operations Heather.

Thank you Jane and Hello, everyone.

Net income for the quarter with $12 7 million return on average asset with 155% and return on average equity was $19 two 9%.

Average loan yield for the quarter was five 5%, representing an increase of 14 basis points over the prior quarter.

Rate increases continued in May 2023, with a third increase this year.

Our net interest margin was 345% for the quarter, while net interest margin for the prior quarter with $3 seven 5%.

The most recent fed rate increases continue to put pressure on deposit costs.

As a result of changes in interest rates and other factors are other comprehensive loss was $1 million. During the three months ended June 32023, as unrealized losses net of tax effect increased on available for sale debt securities from 12.

As of March 31, 2000, $23 million to $13 million as of June 32023.

Noninterest income increased to $2 8 million in the second quarter from $1 4 million in the previous quarter.

Due primarily to a $1 $3 million gain in other income recognized on distributions received on investments in venture backed funds. During the three months ended June 32023.

Noninterest expense grew by $1 9 million in the three months ended June 32023, as compared to the three months ended March 31 2023.

Primarily due to increases of $500000 in operating expenses largely related to seasonal travel and conference fees.

300000 in advertising and promotional for business development expenses.

100000, and data processing and software corresponding with growth of the bank, partially offset by a $200000 decrease in salaries and employee benefits.

Now that we've discussed the overall results of operations I will now hand, it back to James to provide some closing remarks. Thanks.

Thank you Heather.

I want to thank everyone for joining us as we discussed second quarter results.

Flagstar Bank has a reputation built on trust speed to serve and certainty of execution, which support our clients' success.

Our financial performance is the result of a truly differentiated customer experience.

Which continues to power the demand for five star banks relationship based services.

We attribute sustained success to our prudent business model and treating customers with an empathetic spirit understanding and care.

We have very proud we are very proud to have earned the trust of those we serve including our shareholders.

In the second quarter, our efforts were recognized as we've received the Raymond James Community Bankers Cup for 2022.

Which was created award community banks that are building long term shareholder value.

Looking to the remainder of 2023, we will be guided by our continued focus on shareholder value as we monitor market conditions we.

We are confident in the company's resilience in any environment and we will continue to execute on our organic growth strategy and disciplined business practices.

Which we believe will benefit our customers our 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 may have.

Ladies and gentlemen at this time, if you would like to ask a question. Please press star and then one using a touchtone telephone if you are using a speaker phone. We do ask that you. Please pickup your handset before pressing the keys to ensure the best sound quality.

So what's your all your questions you May press star two.

Once again that is star and then wanted to join the question queue questions will be taken in the order they are received.

Our first question today comes from Andrew <unk> from Stephens. Please go ahead with your question.

Hey, good morning, James Good morning, Heather.

Good morning, Andrew.

Hey.

James if I could just start on.

The team hire this quarter, maybe getting into some of the specifics.

How many frontline bankers or videos came with the team how does that compare to the size of your current BD staff and then.

What type of book of business, both the loan and the deposit side do you think this team can build over time.

Sure.

To date, we've hired five people three our experienced business development officers in two or more into the relationship manager role and.

So thats so far what.

What we've done in that particular market, we expect that we may do some more so we certainly will keep everybody posted on that.

The book of business that they are going after is very similar to what we do up here from a depository perspective.

These individuals are deposit forward.

Business development officers.

NII on the lending side I expect they will probably do some commercial real estate lending owner occupied commercial real estate lending but.

That's kind of their emphasis that they've had in their career and they've been very successful.

Okay very good and then on the on the expense front I know the expenses stepped up just a little bit this quarter and obviously, some some hiring and capitalizing on that end market opportunities for you guys. Just can you maybe help us out with thinking about the expense run rate moving forward.

Yes, so if you shave off by about $100000 from what we incurred in Q2 that would be a good run rate for the remainder of the year for expenses.

Got it.

And then.

James I heard your prepared remarks, just on the strength of the pipeline heading into the third quarter it sounded like referencing.

Loans, specifically and perhaps you've got some tailwind with some C&I oriented bankers, but just.

What about the pipeline on the deposit side.

How does that compare to the.

Lending pipeline heading into the back half of the year and then how should we think about the incremental mix of the deposit growth from here.

The deposit pipeline continues to be higher.

Higher.

Significantly higher than our loan pipeline.

So we're very happy about that.

And we expect that pipeline to continue to grow.

With the addition of these of our team down in San Francisco and also continued execution of our folks out here.

The capital region, and up and down the valley.

So.

The mix I think is going to be.

Probably more oriented towards.

Noninterest bearing deposits.

In liquidity for businesses that we bring onboard.

As you probably know there is a mix.

That a lot of these commercial accounts have their operating accounts and then they have where their liquidity is.

So I think youll see growth in those areas.

I think what you'll also see maybe a diminishment of I'm going to say more wholesale deposits as we carry on for the remainder of the year certainly it's our goal to buy $12 31.

To eliminate our broker deposit book right now which decreased.

Heather from.

As of 30 June two.

Two from March 'twenty, one I think by what we did we declined broker deposits during the second quarter by $15 million and then we've also continued to pay down the broker deposits since quarter end, yes. So I think what we're trying to do is.

Kind of diminished for that wholesale aspect, if you will Andrew of our deposit mix and I think we've had some success and we're looking forward to more success in that and that those particular.

Positive mix.

Structures.

I appreciate it.

Great to see that in the second quarter.

I'll step back in the queue. Thanks for taking the questions.

Thank you.

And our next question comes from Gary Tenner from D. A Davidson. Please go ahead with your question.

Thanks, Good morning.

I wanted to kind.

Kind of asking another question regarding the deposit versus loan pipeline I know coming into the year and even during April earnings.

The commentary about the size of the deposit pipeline versus loan pipeline was pretty significantly weighted towards deposits I think at one point you had maybe two weeks and the deposit pipeline versus loans.

Obviously.

A lot of.

Unusual times here in the second quarter, so I'm not trying to hold you to that number in terms of the relative growth, but obviously it didn't translate to core deposit growth outweighing or outpacing net loan growth in the quarter. So I'm just wondering James if you could comment about kind of churn within the deposit portfolio, maybe intra quarter trends.

And the core deposit book, just to give us a sense of kind of what the quarter looked like.

Sure.

Yes.

I think we've previously mentioned there is a diminishment slight diminishment of broker deposits.

So that was.

I think that was a good trend and we expect that to continue as we as we move forward for the remainder of the year.

<unk>.

Here's the interesting thing about deposit pipelines versus loan pipelines.

Loans loans in your pipeline get booked a lot more quickly than deposits relationship ships being brought on and so I would say that if I was to kind of maybe quantify that in terms of length in the pipeline I'm going to say that deposit.

Lines have kind of a duration of two X would alone alone.

It would be.

I E. If you book alone it's going to take you maybe 60 days to 65 days, which is I think as our average when it hits, our our pipeline and in a positive relationship could take twice that and sometimes three times that.

So.

They don't necessarily come on board at the same time.

So that's why you went through your deposit pipeline to be significantly higher than your loan pipeline.

And what we saw in the second quarter, you saw loan growth outpace deposits.

On a year to date basis I think.

Our deposit growth is slightly ahead of loan growth.

A five 3% year to date as opposed to loan growth of four 9%, we're targeting a 10% deposit growth for the year, Gary and an 8% loan growth. So we're not we're not way off that mark.

What's important I think as we move forward.

We're going to be replacing some wholesale deposits with good core deposits.

So you may see deposits not like grow appreciably.

But the mix is going to change, which is really what we're trying to accomplish here.

And it's just going to be.

We operate in a very competitive environment in which I think you all know.

And it's it's a significantly more difficult to bring on deposit growth of those relationships than it is to bring on alone.

But now I think they are all coming together I think that where we are.

We're getting a little better what we do from a relationship onboarding process.

We've got a great group of relationship managers that help us do that and a great group of business development officers. We now have 21 business development officers. If you don't if you don't include me and Mike Russo If you do it's a little higher.

So we're excited about what we're doing system wide.

And we've had great success in terms of bringing on new very large deposit relationships, which we think are going to continue to expand for the remainder of the year.

Thanks, James I appreciate.

The thoughts there and then follow up just in terms of again on deposits but.

Heather can you provide the interest bearing deposit spot rate as of June 30.

Possible maybe.

Core interest bearing deposits, if that's something that's available.

Yes, so the spot rate was two four at the end of the quarter.

And that's just our interest bearing.

Two point or <unk>.

For insurance earnings or.

Or is that sort of thing.

At June 30 at Pryor for all deposit.

Everything.

Got it okay. Thanks, very much for taking my question.

Full deposit cost.

And once again, if you would like to jump back in the question can you May Press Star and then one blood draw yourself, you May press star and two.

Our next question comes from Woody lay from K VW. Please go ahead with your question.

Yes, thanks for taking my questions.

I just wanted to follow up on that.

Positive.

Outlook.

Based on based on that spot rates it looks like a lot of the heavy lifting was done.

Towards the beginning of the quarter I mean do you think that do you think the NIM can begin to stabilize stabilized here coming into the next quarter.

Yes, it's our sense that youre going to see you.

You may be a little bit more decline in NIM in the third quarter probably.

Probably.

Anywhere between three three to three <unk>.

Three five.

So.

I think that Thats, probably where it's going to settle out again thats going to be a function of how rapidly we can bring on and execute on our pipeline our deposit pipeline, but we do expect there's going to be some decline in NIM in the third quarter Woody.

To that particular level.

Got it and then I mean, assuming.

We sort of hit a stable rate period.

How would you think the NIM reacts from there do you think it's.

More so just holding it steady or do you think it.

With it with the loans youre, bringing on.

Now if we get a level interest rate environment, we could see increases.

It's our expectation that that would represent kind of a steady.

Range.

Q3, and Q4, and we hope as we look forward to 2024 that we'd see.

At 10 to 15 basis point improvement from that level.

Now that's it.

Yes.

The fed just.

I'm not going to say it wouldn't be a positive which is be a stop.

And we're not at this point, we're not in those comments were not anticipating any.

Declines in the fed funds rate and that's what we think we'll be able to settle out on now there are declines I think you can see some some strong improvement of our NIM.

Yes.

Alright that makes total sense.

And then last for me more of just a housekeeping item, but I know there was some noise in the tax rate for the quarter. Just on a go forward basis do you expect that to increase back up closer to the 29% level.

We're targeting about 29, 3% that's what we're forecasting.

We did a state tax study during the second half of the year and we will have some some amended returns and returns to file in new states, but so going forward, we anticipate about $29 three is our tax rate.

Got it thanks guys.

Yeah.

Okay and our next question is a follow up from Andrew Charles from Stephens. Please go ahead with your follow up.

Hey, Thanks for the follow up questions here.

I'm looking at the loan originations.

Quarter end.

Pretty healthy pretty healthy step up versus the first quarter, but the payoffs and Paydowns also stepped up pretty materially.

Was just curious James was there anything unusual from a pay offer a paydown perspective this quarter.

Well we had.

We were just talking about that Andrew we had.

On a pretty significant office.

Loan payoff, which we were all happy to see.

We normally have a fair amount of churn within our MHC portfolio.

Yes.

As our operator investors kind of grief.

Reposition their portfolios.

So that's always present.

And.

Just normal amortization is really but there were some large payoffs.

<unk>.

We're happy to see.

We're as those loans pay off they are usually at lower rates.

And it gives us an opportunity to redeploy.

Into higher loans principally loans.

And so we think that long term, that's going to help our margin.

I don't know if we're going to anticipate the same degree of originations.

In.

<unk>.

In Q3, as we saw in Q2, I think it will be diminished.

So.

I wouldn't expect that on a go forward basis, we're still going to stick to our 8% loan growth.

That we expect for the full year Andrew.

Got it understood I appreciate the color there and then on the all the new originations this quarter what was the weighted average yield that does from meda.

Yes, so those were originated at about 777%.

Okay.

Got it and then.

James I guess at an 8% loan growth rate.

It seems like your capital position should should build modestly from here, but it does sound like there are some kind of growth tailwind on your back as well. So just wanted to get kind of updated thoughts on the capital position, where you stand today.

Well, we certainly would like to grow.

Common tangible equity to risk weighted assets so.

That's our focus we saw a slight improvement in the second quarter.

So that's our orientation in terms of what we're trying to do there.

<unk>.

So we think that we can sustain this now with respect to this type of growth I E.

8% loan growth, 10% deposit growth.

We think we can.

Sustain our capital positions.

And grow our capital position. So time will tell if we have opportunities to grow certainly on the deposit side that outpaced that.

We will take advantage of that now we understand that may require additional capital in.

Andrew as you know we did file a.

Shelf in Q1 $250 million.

And that's good for three.

Three years.

So.

That's that's available I don't I'm not suggesting at the capital markets are open right now so.

But certainly things have improved over the last couple of weeks so.

It's there.

We take advantage right now we don't think we need to take advantage of that.

Again, our focus is growing on.

Is growing.

Common tangible equity to risk weighted assets.

Yes, Okay understood I appreciate it.

The opportunity for the follow ups.

Thank you.

And ladies and gentlemen that will conclude our question and answer session. At this time I would like to turn the floor back over to management for any closing remarks.

Great. Thank you.

Five Star Bank has on our continued growth.

Its path as we execute on 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.

Recent successes include the company, earning the number one ranking on the S&P Global market intelligence annual rankings of 2020 two's best performing community banks in the nation with assets between $3 billion to $10 billion.

We are very pleased to be recognized and believe this ranking builds upon the trust, we have created with our customers and communities.

The company also has a bauer financial superior rating of five out of five.

And in IDC superior rating of 300 out of 300.

The company is also a super Premier performing bank with the Fiddly reports.

We are a driving force for economic development.

Trusted resource for our customers.

And a committed advocate of our community.

We look forward to speaking with you again in October to discuss earnings for the third quarter of 2023 have a great day and thank you for listening.

Ladies and gentlemen, the conference has now concluded we thank you for attending today's presentation. You may now disconnect your lines.

Okay.