Five Star Bancorp - Earnings Call - Q2 2025

Executive Summary

• EPS of $0.68 beat Wall Street consensus by $0.045, driven by stronger net interest income and higher average loan yields, while S&P-defined “Revenue” missed by ~$1.8M; NIM expanded 8 bps to 3.53% and efficiency improved to 41.03%. EPS Actual vs Consensus: $0.68 vs $0.635*; Revenue Actual vs Consensus: $35.83M* vs $37.64M* (definitions differ; see Estimates Context) [GetEstimates]*.
• Organic growth continued: loans +$136.2M QoQ (+3.76%) and deposits +$158.3M (+4.24%); non-interest-bearing deposits rose to 25.78% of total, and short-term borrowings remained zero.
• Asset quality remained strong (NPLs/loans 0.06%), capital ratios well above well-capitalized thresholds, and liquidity ~$2.15B immediately available.
• Catalysts: Bay Area expansion (Walnut Creek opening in Q3), new Food & Agribusiness vertical, and management guidance for Q3 expense run-rate (+$0.5–$0.75M) and lower effective tax rate (~26.65%).

Values retrieved from S&P Global for all items marked with an asterisk (*).

What Went Well and What Went Wrong

What Went Well

• Net interest income rose 7.47% QoQ to $36.515M on loan growth and loan yield improvement; NIM increased to 3.53% (+8 bps QoQ; +14 bps YoY).
• Deposits grew +$158.3M QoQ (+4.24%) led by new money market accounts (+$87.4M) and new non-interest-bearing accounts (+$68.7M); non-wholesale deposits increased +$191.6M.
• CEO: “exceptional quarter… organic growth strategy fueled new account openings” and highlighted technology, operating efficiencies, conservative underwriting, and concierge banking approach.

What Went Wrong

• S&P-defined “Revenue” missed consensus despite strong NIM expansion (actual $35.83M* vs $37.64M*), reflecting differences in revenue definitions versus bank-reported components [GetEstimates]*.
• Provision for credit losses increased QoQ to $2.5M due to loan growth and higher net charge-offs, with one CRE loan placed on nonaccrual (NPLs/loans 0.06%).
• Non-interest expense rose +$0.68M QoQ (+4.53%) driven by business travel, conferences, training, and promotional expenses tied to expansion.

Transcript

Speaker 4

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 your question, you may press star and then one on your telephone keypad. To withdraw your questions, you may press star and two. Before we get started, we would like to 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, 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.

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, 2024, and the quarterly report on Form 10-Q for the three months ended March 31, 2025, and in particular, the information set forth in Item 1A, risk factors in those reports. Please refer to slide two of the presentation, which includes disclaimers regarding forward-looking statements, industry data, unaudited financial data, and non-GAAP financial information included in this presentation. Reconciliations of non-GAAP financial measures to their most directly comparable GAAP figures are included in the appendix to the presentation. The presentation will be referenced during this call, but not followed exactly, and is available for close reviewing on the company's website under the Investor Relations tab.

Please also note today's event is being recorded. At this time, I'd like to turn the presentation over to James Beckwith, Five Star Bancorp President and CEO. Please go ahead.

Speaker 2

Thank you for joining us to review Five Star Bancorp's financial results for the second quarter of 2025, which were released yesterday. The release is available on our website at fivestarbank.com under the Investor Relations tab. Joining me today is Heather Luck, Executive Vice President and Chief Financial Officer. The strength of our second quarter results is emblematic of our differentiated client experience through our unwavering commitment to clients and community partners throughout Northern California. Financial highlights during the second quarter included $14.5 million of net income, earnings per share of $0.68, return on average assets of 1.37%, and return on average equity of 14.17%. Our net interest margin expanded by eight basis points to 3.53%, and our cost of total deposits declined by two basis points to 2.46%. Our efficiency ratio was 41.03% for the second quarter.

During the second quarter, we saw continued balance sheet growth as loans held for investment grew by $136.2 million, or 15% on an annualized basis. Deposit growth was approximately $158.3 million, or 17% on an annualized basis. Our asset quality remained strong, with non-performing loans representing only six basis points of total loans held for investment. We continue to be well capitalized, with all capital ratios well above regulatory thresholds for the quarter. On July 17th, our board declared a cash dividend of $0.20 per share on the company's common stock, expected to be paid in August. We continue to deliver value to our shareholders. Our total assets increased during the second quarter by $168.4 million, largely driven by loan portfolio growth within our commercial real estate portfolio, which grew by $125.4 million. Our loan pipeline remains strong.

The credit quality of our overall loan portfolio remains strong due to our conservative underwriting practices, robust monitoring programs throughout the life of a loan, and our relationship-based approach to lending. As a result, we have a very low volume of non-performing loans. Despite a half-a-million-dollar increase during the second quarter, this increase was due to one commercial real estate loan being put on non-accrual status during the quarter. We recorded a $2.5 million provision for credit losses during the quarter. The increase in our total liabilities during the second quarter was primarily the result of increase in both interest-bearing and non-interest-bearing deposits. Interest-bearing deposit growth was largely due to new money market deposit accounts being opened in the quarter, pushing $87.4 million in new balances. Non-interest-bearing deposits were mainly driven by the opening of new accounts during the quarter, pushing $68.7 million in new balance.

Non-interest-bearing deposits made up 26% of total deposits as of June 30th, 2025, an increase from 25% as of the end of the prior quarter. Approximately 59.9% of our deposit relationships total more than $5 million. These deposits have a long tenure with the bank, with an average age of 8.3 years. We believe our deposit portfolio to be a stable funding base for our future growth. Heather?

Speaker 5

Thank you, James. Net interest income increased $2.5 million from the previous quarter, primarily due to a $3.5 million increase in interest income, driven by loan growth and improvement in the average yield on loans. This is partially offset by a $1 million increase in interest expense related to deposit growth. Non-interest income increased to $1.8 million in the second quarter from $1.4 million in the previous quarter, primarily due to an overall improvement in the estimated earnings related to investments in venture-backed funds during the three months ended June 30, 2025. Non-interest expense grew by $700,000 in the three months ended June 30, primarily due to increases in business travel, conferences, training, and promotional expenses associated with the expansion of the business development team. This is partially offset by an increase in deferred loan origination costs. I'll now hand it back to James.

Speaker 2

Thank you, Heather. During the quarter, we announced the expansion of our food and agribusiness vertical. We also announced the expected opening of our Walnut Creek office in September 2025 and added five new business development officers to the team to support these efforts. We continue to grow our presence in the San Francisco Bay Area with 34 employees and $456.9 million in deposits as of June 30, 2025. Five Star Bancorp has a reputation built on trust, speed to serve, and certainty of execution, all of which support our client's success. Our financial performance is the result of a truly differentiated client experience, which continues to power the demand for Five Star Bancorp's relationship-based services. We are proud to have earned the trust and confidence of those we serve, including our shareholders.

As we move into the third quarter of 2025, we are confident in the company's resilience and demonstrated ability to adapt to changing economic conditions while remaining focused on the future and execution of our long-term strategic plan. The beneficiaries of our focused business approach are our clients, employees, and community. We believe that if we support these constituents well, our shareholders will realize the benefits. We appreciate your time today. This concludes today's presentation. Now we will be happy to take any questions you might have.

Speaker 4

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, those dialed in may press star and then one on your telephone keypads. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your questions, you may press star and two. Questions will be taken in the order in which they are received. Our first question today comes from David Feaster from Raymond James. Please go ahead with your question.

Speaker 3

Hi, good morning, everybody.

Speaker 2

Hey, good morning, David.

Speaker 3

I want to start, I mean, obviously, you guys have had good loan growth, but to me, the most impressive thing that you guys have been able to do is your core deposit growth. It is extremely impressive, and I know it's not easy to do. Could you just touch on where you're having success? Obviously, some in the Bay Area. Could you just touch on your thoughts on your ability to continue to drive core deposit growth and the ability to reduce deposit costs? Is there much funding cost leverage left?

Speaker 2

Let me take the first part of your question first, if I could. We saw growth across our entire platform, all of our verticals, and all of our geographies. I think the reason for that, David, is it's fundamentally that we've got a lot of feet on the street. We've got 40 business development officers now that are highly motivated, very experienced, and well-connected into the communities and the industries they serve. That's what's really driving this. Everybody is having success. We're very supportive of those efforts. We spend a lot of time, personally, I spend a lot of time with them in terms of bringing in new relationships to the bank. From a funding cost perspective, I think we've kind of seen the end of any effects of any rate cuts.

I know we're all standing around in the kitchen waiting for the Fed to cut again, but we're not really expecting that to happen. We're not sure when that might happen, and we're not relying on that happening. I think you're seeing our funding costs will continue to maybe go down just a little bit more, but it's really about the mix. To the extent that we have a very successful last half of 2025 in terms of raising non-interest-bearing deposits, which we believe we've got some really great opportunities in our deposit pipeline right now to achieve that. It's really about fundamental execution, David, and the fact that we just have so many feet on the street.

Speaker 3

That's great. Maybe just touching on the Bay Area a bit more broadly, you've obviously had a lot of success in San Francisco. It's been really impressive. You've got the Walnut Creek office opening here soon. I'm curious, first of all, could you touch on the pulse of the Bay Area from your standpoint and how much opportunity you see left there in terms of both hiring and expansion in that market? Obviously, it's a huge market, just kind of curious the opportunities and the potential that you see in the Bay Area.

Speaker 2

Sure. We're excited about the Walnut Creek opening. I was there this week, a couple of days ago. The business environment in the Bay Area, it's changed in the last couple of years. I mean, you just take San Francisco in particular. There's a new mayor there, very energetic, business-minded. I think that that city is turning around. It's palpable in terms of just if you're just downtown in the financial district, you just get that sense. I'm excited about that. Walnut Creek is a beautiful place. It's got a great shopping district, a great food scene, and it's growing, and it really is, I think, done well, just as a standalone area since the pandemic and since, what I'll say, what happened to San Francisco. You saw some, you've seen some migration out to the East Bay and particularly Walnut Creek.

We're excited about what we're doing in the Bay Area. Now, future expansion in the Bay, I think you would probably expect to see it down in the South Bay, David. Those efforts are underway right now. I can't really share any visibility on that with you right now, but certainly, that's where we're headed. We've got to make sure that our Walnut Creek operations are sound and solid, and we're going to grow robustly. We've got some great business development people whose focus is Walnut Creek in the East Bay that have joined us in the last year, in the last six months. That's how kind of we see it. We're not done expanding in the Bay. The next expansion, certainly outside of Walnut Creek, will probably be somewhere in the South Bay.

Speaker 3

That's great. Maybe last one from me. Your business model is obviously extremely scalable. You've done a great job driving pretty material revenue growth with the infrastructure you've got. You're still continuing to invest. I mean, we're sitting here with a low 40% efficiency ratio, but the stage is set for continued outsized loan growth and revenue growth, potential for further margin expansion as we continue to reprice the backbook. Is a sub-40% efficiency ratio in the cards, or are there other investments or expenses that you maybe accelerate, just given the strength you're seeing? Just kind of curious, how do you think about that?

Speaker 2

We're very keen to continue to invest in our business. We did announce in the second quarter that we're expanding our food and agribusiness business, and we've brought in some very seasoned professionals, very experienced, that have great connectivity to the space. We're continuing to invest in our business. These folks are in mid-career and not necessarily inexpensive, let me say that much, but we're happy to have them. We think we're going to expect great things. I single that out, David, just as an example of how we continuously invest in our business. We're always looking to add talent. To achieve something that's sub-40, you know, it's not necessarily a goal per se, but I could see it happening. We do have a lot of operating leverage in our business right now. We'll see what the rest of the year looks like.

Speaker 5

Yeah. David, just to add on to that, while we have expanded our headcount from a business development and customer-facing side, we've also continued to build out our back-office support teams as well. In those mixtures, you're seeing not only sales growth, but you are seeing back-office support as well. From my perspective, there's no real significant investments that we do need to make to either improve our technology or improve the support side. We're kind of just, as we go, adding more headcount to make sure that we're supporting our customers and staff as appropriate.

Speaker 3

That's terrific. Thanks, everybody. Great quarter.

Speaker 2

Thank you so much, David.

Speaker 4

Our next question comes from Woody Lay from KBW. Please go ahead with your question.

Speaker 0

Hey, thanks for taking my questions. Maybe just one quick follow-up on expenses. How should we think about the run rate in the third quarter with the Walnut Creek office coming online?

Speaker 5

I would say add about $500,000 to about $750,000 for our next quarter. We will have a little bit of increased expense for Walnut Creek. That should probably bake in enough for your estimate.

Speaker 0

All right. Very helpful. I had a follow-up on deposits as well in the non-interest-bearing segment. Saw really strong growth in the quarter. I was just curious, you know, how sticky do you view that growth? I know you've got some wealthier clients and wasn't sure if it was kind of just a one-quarter increase or if you think that the jump up is sustainable from here.

Speaker 2

We believe it to be sustainable. As we continue to bring on new relationships, all of which have some degree of some component of non-interest-bearing deposits in those relationships, we think will continue to grow. There's nothing that per se stands out in terms of an anomaly at all. It's just growth of accounts, number one, and new accounts.

Speaker 0

All right. Last for me, just looking at the growth in the quarter, it looked like it was mostly driven from the CRE bucket. I was just curious on the sub-verticals where you're seeing the best growth opportunities and vice versa, maybe other verticals where you're not looking to grow at this time.

Speaker 2

I think we're looking to grow all of our verticals across the board. I mean, we continue to be very active in the mobile home park and RV park space along with storage. We are looking at doing pretty well in, I'll say, multifamily student housing in particular. Those are areas that I think that we've done a decent job on. We've also financed, you know, I would say, some office buildings. I don't want you to get all worried or anything, Woody, but these are buildings in which there's new capital, fresh capital came to the table. Along with this massive reset that's going on, new equity comes to the table. Price per square foot, which is now $250 to $350 a foot, as opposed to $900 to $1,000 a foot of what it was five years ago.

We provide an appropriate amount of leverage to that, whether 50%, 60%. We feel those loans are incredibly safe. This is about the turnaround that we're seeing in, I'm going to in particular, in downtown San Francisco. Those particular categories, I think, kind of make up a lot of the growth that we saw in our commercial real estate portfolio.

Speaker 0

All right. That's great color. Thanks for taking my questions.

Speaker 2

Good.

Speaker 5

Thank you.

Speaker 4

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

Hey, good morning. I'm on the phone for Gary here. Can you talk about, can you give us a specific number on loan purchases done this quarter? What's in the docket for the next half of the year?

Speaker 2

Of loan purchases?

Yep.

Yeah. What we're doing is just maintaining our balances that we've had. I think we established this probably last third quarter of last year. We're running about, we try to target $300 million of what we call Bankers Health Group purchases, not purchases, but outstanding balance. Because these loans amortize quickly, we constantly have to.

Speaker 5

Yeah, we made during the quarter about $44 million in purchases, but really, that's just to keep the concentration within that $300 million range. You'll see purchases there, but it's just to renew payoff.

Speaker 2

Yes, we're targeting an average outstanding of around $300 million with those loans.

Okay. That makes sense. Thanks. Great name expansion this quarter. Anything unusual in the loan yield expansion of 7 bps?

No, it's just a combination of a bunch of different things. One, as our loan book continues to reprice, most of the loans that we do have five-year resets on them in our commercial real estate space. These loans that were put on in 2020 are now resetting. They were resetting from very low rates. You have that impact. You also have all of our current production, which is a much higher rate.

Speaker 5

Yeah. The Q2 production that we did had a weighted average rate of 7.03%. That was a nice pickup for them.

Speaker 2

That's how we've been able to expand our yields in our loan portfolio. Repricing one, but really, new production is really driving it.

That's great to hear. Last one for me. On the tax rate outlook for the remainder of 2025 and beyond, with regards to the new California tax law change, can you give us your outlook on that?

Speaker 5

Yeah. For your modeling purposes, I would use a tax rate of $26.83. That's our statutory rate. We're forecasting an effective tax rate of about $26.65. That tends to fluctuate a little bit depending on permanent items, but within that range should be good for your model.

Thanks for taking my question.

Speaker 2

We were very happy to see the Governor sign that bill, by the way.

We were.

Speaker 3

I'm sure you were. Thank you.

Speaker 4

Our next question comes from Andrew Terrell from Stephens. Please go ahead with your question.

Speaker 6

Hey, good morning. This is Jackson Laurent on for Andrew Terrell.

Speaker 2

Hey, Jackson.

Speaker 6

Most of my questions have been asked, but if I could just piggyback on loan growth. Obviously, growth was very impressive this quarter. I believe we were talking to a 10% to 12% balance sheet growth number for 2025 last quarter. I was just wondering if you could kind of give us some updates on how you expect loan growth to trend in the back half of the year. If you're also still thinking about growth in the 10% to 12% range for the full year.

Speaker 2

Yeah, obviously, we've done a little better than that. When I looked at our pipeline and what I expect to pay off, I still feel kind of comfortable in that particular range. We've got some large construction loans that will probably pay off at some time in the next year. They're doing quite well. Lease up has actually done really well. We expect them to probably get put to bed with an agency, not another bank, heaven forbid. We're going to stick with that in terms of guide on both sides of the balance sheet, which we think if we can achieve that low low-teen growth, we think we're going to do quite well at the bottom line. Our pipelines are good, very strong for loan pipeline and our deposit pipelines. We're excited about that.

We think that that's a reasonable assumption in terms of growth as we move forward to the last half of 2025.

Speaker 6

Got it. That's great, Keller. Thank you. Lastly, if you could give us a little bit more color on the new food and agribusiness vertical, as well as just a little bit more about the team in place. I know it's early innings, but would love to get a sense of growth potential you see from that business and avenue going forward.

Speaker 2

Sure. You know, the group that we hired is led by Cliff Cooper. He's got a very experienced team that he works with. They're going after large, initially large, large processors, all types of ag commodities that exist in the West Coast. These credits that we're going after are C&I, middle market type of credits, companies whose revenue could be $50 million to $500 million and that have been in business for generations. This particular market, we believe to be underserved by the majors. This is why we're stepping in here. California is a big ag state. For us being in California, we were doing some ag prior to Cliff and team joining us, but we never felt like we were, I'm going to say, taking advantage of the opportunity. With Cliff and his team, we see just a tremendous amount of opportunity.

One, in terms of it'll help us maybe balance out our loan portfolio. Maybe, over the long run, we'll be able to reduce our concentrations in commercial real estate if Cliff is successful. We have every reason to believe he will be. We're very excited about that.

Speaker 6

Great. Thank you for the color. That's all I had. I'll step back.

Speaker 2

Thank you.

Speaker 4

Ladies and gentlemen, at this time, that will end today's question and answer session. I'd like to turn the floor back over to Mr. Beckwith for any closing remarks.

Speaker 2

Thank you. It's with deep appreciation and gratitude that we have advocated for our clients and championed the communities we serve. We always will. As our expansion in the San Francisco Bay Area continues, and as we build on the legacy of superior community banking in the Capitol region and North State, we answer the call of businesses and organizations who desire a time-honored banking partner. Five Star Bancorp is here to stay. We are proud to have experienced another quarter of significant organic growth built upon a sturdy foundation of client service, expanded relationships, and products, and the loyalty of our exceptional clients. We will always remember that we exist because of our clients' trust in us. We believe in that. It's our privilege to continue as a driving force of economic development, a trusted resource for our clients, and a committed advocate for our communities.

We look forward to speaking with you again in October to discuss earnings for the third quarter of 2025. Have a great day, and thank you for listening.

Speaker 4

The conference has now concluded. We thank you for attending today's presentation.