Five Star Bancorp (FSBC) 2025 Q3 法說會逐字稿

Welcome to the Five Star Bancorp third quarter earnings webcast.

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 10K for the year ended December 31, 2024. And quarterly reports on Form 10 for the three months ended March 31, 2025 and June 30th, 2025 and in particular the information set forth in item 1A risk factors in those reports.

Please refer to slide 2 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 closer viewing on the company's website under the investor relations tab.

Please note this event is being recorded.

I would now like to turn the presentation over to James Beckwith, Five Star Bancorp President and CEO. Please go ahead.

Thank you for joining us to review Five Star Bancorp's financial results for the third quarter of 2025, which were released yesterday. The release is available on our website at ivestarbank.com under the investor relations tab. Joining me today is Heather Luck, executive Vice President and Chief Financial Officer.

Our third quarter results include outstanding growth in loans and core deposits attributable to our differentiated client experience and organic growth strategy. We maintain our unwavering commitment to clients and community partners throughout Northern California.

Financial highlights during the third quarter include $16.3 million of net income, earnings per share of $0.77. Return on average assets of 1.44% and return on average equity of 15.35%. Our net interest margin expanded 3 basis points to 3.56%, and our cost of total deposits declined by 2 basis points to 2.44%. Our efficiency ratio was 40.13% for the third quarter.

During the third quarter, we saw continued balance sheet growth as loans held for investment grew by $129.2 million or 14% on an annualized basis. Total deposits increased by approximately $208.8 million or 21% on an annualized basis. During the quarter, non-wholesale deposits increased by $359 million or 11%, while wholesale deposits decreased. By $150.2 million or 23%. Our asset quality remains strong, with non-performing loans representing only 5 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 October 16th, our board declared a cash dividend of $0.20 per share on the company's common stock, expected to be paid in November. We continue to deliver value to our shareholders. Our total assets increased during the third quarter by $228.3 million. Largely driven by loan growth within the commercial real estate portfolio. Which grew by 77.7 million.

Our lone pHeather ipeline remains strong. The credit quality of loans remains strong due to our conservative underwriting practices. Robust monitoring 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, which declined by 149,000 during the third quarter. We recorded a $2.5 million provision for credit losses during the quarter, primarily due to loan growth. The increase of our total liabilities during the third quarter was the result of growth in interest-bearing and non-interest-bearing deposits related to new accounts.

The new interest-bearing deposit accounts contributed to 171.6 million of overall growth. New non-interest-bearing deposits contributed to $28.8 million of overall growth. Non-interest-bearing deposits remain consistent at 26% of total deposits as of September 30, 2025. Approximately 60% of our deposit relationships total more than $5 million. These deposits have a long tenure with the bank, with an average age of 8 years. We believe our deposit portfolio to be stable funding base for our future growth.

And now I will hand it over to Heather to present the results of operations. Heather.

Thank you, James, and hello everyone. Net interest income increased $2.8 million from the previous quarter, primarily due to a $4.3 million dollar increase in interest income driven by new loan production at higher rates, contributing to overall improvement in the average yield on loans.

This was partially offset by a $1.4 million dollar increase in interest expense related to core deposit growth during the quarter of $359 million which exceeded the $150.2 million of higher cost wholesale deposits maturing during the quarter.

Non-interest income increased to $2 million in the third quarter from 1.8 million in the previous quarter, primarily due to an increase in SWAP referral fees recognized during the three months ended September 30, 2025, partially offset by no gain on sale of loans recognized during the quarter in connection with our strategic shift to reduce wholesale SBA loan production and sales.

Non-interest expense grew by 900,000 in the three months ended September 30, 2025. This is primarily due to an increase in salaries and employee benefits related to increased headcount to support customer facing and back-office operations.

We continue to invest in our Bay Area expansion, evidenced by the opening of our newest full-service office in Walnut Creek, contributing to a slight increase in occupancy and equipment.

And now I'll hand it back to James for closing remarks. James.

Thank you, Heather. During the quarter, we opened our 9th full-service office in Walnut Creek in response to the demand for our services in the San Francisco Bay Area. Our presence in the San Francisco Bay Area continues to grow with 36 employees and $548.9 million deposits as of September 30, 2025.

In addition to the new Walnut Creek office, we are pleased with the growth of our previously announced food, agribusiness, and diversified industry business. Where clients benefit from our global trade services and exceptional treasury management tools.

Five Star Bank success serves as strong testimony to clients who value our team of committed professionals who provide authentic relationship-based service. We continue to ensure our technology stack, operating efficiencies, conservative underwriting practices. Exceptional credit quality and a prudent approach to portfolio management will benefit our customers, employees, community, and shareholders.

As we look to the fourth quarter of 2025, we thank our employees for their outstanding commitment to ensuring Five Star Bank remains a safe, trusted, and steadfast banking partner. 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 strategy. 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 questions you might have.

(Operator Instructions) David Feaster, Raymond James. - Analyst

Hi, good morning, everybody.

Hey David, how are you doing?

I am great. I wanted to start on the deposit front. I mean, perhaps in my mind, perhaps the core deposit growth that you saw was one of the most impressive parts about the quarter, you decrease wholesale funding, just kind of curious where you're having the most success driving core deposit growth, and how you think about that opportunity to continue to optimize the funding base a bit as you do that.

Well, certainly third quarter David was exceptional, and it was a lot of things went our way in terms of new clients, which we're very excited about and we saw growth across our platforms and all of our geographies. So that was very exciting. I think that to to replicate that type of quarter again David's going to be pretty difficult when we say that, but we were pretty happy about where we ended up.

Now, our deposit pipeline just like our loan pipeline remains strong. Across all of our platforms and geographies, and so we don't anticipate that type of growth on a go forward basis. We're looking for deposit growth on an absolute basis, not annualized between probably anywhere between 1% to 2% in the fourth quarter. So, I think the third quarter was very strong. I say that because we're still trying to deal with the broker deposits that we have a long-term.

Desire to eliminate those, and we're making progress. We made very substantial progress in the third quarter and we'll just have to see how the fourth quarter goes.

So that probably will have an impact in terms of limiting overall deposit growth to the extent that we pay any of those off and don't renew.

But we are anticipating some growth but not to the same extent that we saw in the third quarter on the deposit side.

Okay, but and the reason for that is just the continued optimization of the deposit based because you're still going to be driving core deposit and I just want to make sure that I'm understanding that right core still driving core deposit growth but using that to pay down broker.

Yeah. Okay.

So, we're the.

Go ahead.

Yeah, perfect. And then maybe switching gears to to the loan side I mean originations were strong, the pipelines, still robust, but payouts and pay downs are still a pretty material head when I think it's the second highest level that I, as far as I can see back, over the past several years, I guess I wanted to first get a sense of what's driving these payoffs and pay downs, how much is it? Losing deals to competitors, through refi or whatever asset sales or just deleveraging, and then how do you think about payoff and pay down activity going forward as rates continue to decline? Is that going to remain a pretty material headwind?

Well, in part, it's our business model with respect to our MHC and RV business, David. We anticipate being in these deals, 3 to 4 years. Before our clients will either sell the properties or take their long-term financing to agency, and we saw a lot of that in the third quarter, and we expect that will continue to happen. Having said that, we also retained a lot of these notes that were maturing, not necessarily maturing, but having their rates reset, because we're typically. We lend on a 5 year fixed rate basis and it'll adjust after this, the rate, the yield will adjust after the 60th month.

And so a lot of that's starting to come through on those originations that were done in 20, particularly in 20, and we'll see some more of that in 21, 26 and 27 for originations in 21 and 22. So, it's just really the nature of our business. There's nothing that we think is unusual about it. We have we recognize that we have to stay ahead of it. We've got the horses to do that. So that's why those, we will continue to build our balances. So we're not necessarily losing deals to anybody. We like to think that we're the quickest no in town. If somebody else wants to do a deal, that's fine. But we're, we like the model, the model's working exactly as like as we thought it was going to work. It's just David fundamentally the nature of our business and the types of credits that we make.

And that and that makes sense. And so with that, I mean you talked about having the team and the horsepower to continue to outpace payoffs and pay downs, you've been really active hiring, recently hired the A team, I guess first wanted to just get an update on, as you think about growth, where are you seeing the growth opportunity today. Kind of an update on the ag team what they're seeing and are there any other segments like that that you might be interested in expanding into organically and higher or lift out a team just kind of curious what you're seeing on that front.

Yeah, let's just talk about the A team. We booked some good credits. We're anticipating booking some very large credits in the fourth quarter, very active in the market. We're excited where that business is going, the credits and the relationships are quite substantial, so. To call them granular would be a complete misnomer. And when we board them, they do move the needle because they're larger deals both on the deposit side and on the loan side. But we like where we're doing that. We're making some penetration in markets. People know are beginning to know that we're serious.

And we're excited about, where we stand in that, and the sales cycle in that business can be long sometimes, over 2 or 3 years, 2 or 3 seasons. So we're very committed to it. Number one, we continue to see growth in our MHC and RV business and we're, we continue to add core clients in the space, and our clients are still, our existing clients are still buying parts.

And so we're excited about where that business is going, and our storage business seems to be very strong also. RV, MHC storage is really a national platform, and we're doing business across the United States. In fact, Heather, we file tax returns in 27 different states. So, we have nexus in all these states, so it's truly geographically diversified. So, David, we expect to see continued growth in in that particular segment.

From a geographic perspective. In our Bay Area loan pipeline remains very strong, and that's, made up of C&I and also CRE lending. We've done a lot of student housing deals in the Berkeley area, and we will continue to look for opportunities there. We, so, that's strong. Our, construction industries group, continues to perform well, and that's primarily a deposit ploy.

So, we're excited where that business is going. Our faith-based business is having a good year, very good year. We expect that to continue to grow. Our non-profit business is very robust, particularly in the Bay Area. So we like where that's going. And and then, of course, our government book in which, David, we focus on small districts, small special districts, if you will. And we've seen a lot of success in that space, and again, that's primarily deposit driven. So, across the platform, we seem to be and geographies, our verticals and our geographies seem to be performing very well, and their prospects are strong. That's very helpful.

Thank you.

(Operator Instructions) Woody Lay, KBW - Analyst

Hey, thanks for taking my questions. wanted to start on the net interest margin outlook, if I just look at y'all's balance sheet, it would seem that y'all are set up pretty well for a down rate environment. So how should we think, based on the most recent cut and the expectation for additional cuts from here, how should we think about the earnings power there?

Well, we think it's pretty good, we recognize we have a near term, we're near-term liability sensitive, and that could, 11,125 basis point cut heather over a quarter would mean what?

About 850,000 of improvement.

So, we see some expansion in our margin that's potential in the in the fourth quarter. 1 to 3 basis points pretty consistent with what we've seen. In the second or the third quarter, maybe we can do a little bit better than that, but that's kind of what our sense of it is right now. We continue to see loan repricing's in our loan portfolio. Sooner or later, we're going to run out of that as those all those loans reset, but the near term, it looks pretty decent for us. So we see continued margin expansion, with these rate cuts. You could tell Woody that, our cost of funds is noticeably higher than our peers, and that's because we do pay up for deposits. In a downright environment, that's going to be our benefit to our benefit, not only in our money market book, but also in our government book, in some extent in our wholesale CD book. So, we like, the way that our balance sheet is constructed in a slight downward, downrate environment.

Yeah, but yeah, definitely seems like a benefit, to the extent we get these additional rate cuts, get the name benefit. Do you think it drives positive operating leverage or does it give an opportunity to keep reinvesting in some of the, in the Bay Area expansion market and some of these new, business lines, how do you think about the toggle there?

Well, we've been pretty active in terms of bringing on. Very talented yet high priced. Bankers, and we, our plans on a go forward basis right now with Heather, we got 41 biz dev people right now have a new one join us next week. So, we're going to continue to look for opportunities to get talent.

Because it's out there, it's still out there. Maybe not out there to the same extent as it was, 2 years or even a year ago, but we like to think we've got this balance between earnings growth and reinvestment, reinvesting back into our business. It's, the toggle is not one way or the other. We like to think we can do both. We recognize that if we didn't continue to invest, our earnings would probably Be bigger, larger, but we're playing the long game here in terms of growing the growing the franchise and taking advantage of opportunities as we see them when they come up. We've always been opportunistic and I don't see us changing that way of doing business.

No, that, that's really helpful. And then just last for me, can you just remind me longer-term how you think about the loan to deposit ratio? I mean, it's down from 104% last year. There's some broker deposit remakes opportunities, so could you just remind us sort of where you aim to target that longer-term.

Well, I think that, we're comfortable at 95%. That's kind of a line that we all look at every month with our board. And that's a good target for us. Sometimes it might be higher, sometimes I might be less. I don't know how far less, but if there's a bias it'd probably be higher, but we do target 95% is is something where we're comfortable at, running, you can run shot at, 100 north of 100, but that's nothing that we think that we'd we'd want to do year in and year out.

Got it. All right. Well, thanks for taking my questions. Congrats on the good quarter.

Thanks so much.

(Operator Instructions) Andrew Terrell, Stephens - Analyst

Hey, good morning. Maybe Heather, I wanted to go back to some of the margin really quick. I think did you say 850,000 positive pick up for each 25 basis point cut? Was that right?

Yeah, for the full quarter though, because it'll take some time for our our wholesale book to reprice so it'll take a full quarter to see the full effect, yeah.

Immediately more.

200 for immediate repricing net.

Yeah, I guess I'm just trying to think through the, you mentioned, margin of 1 to 3 in the fourth quarter, 850,000. 78 basis points of margin. We we'll get the full quarter of the September cut in the fourth quarter and then it looks like in October and maybe a December cut as well that, it feels like the margins should be up more than 1 to 3 basis points. So, I'm, I guess I'm trying to ask, what are maybe some of the puts and takes to the margin in the 4th quarter that could limit what it feels like it should be a decent bias higher.

So I think I'm going to weigh in on this so you don't mind, Heather. So, Andrew, in our government, deposit book, it's driven by la, local area investment fund rates, and those change every month.

So you really don't see an impact of a Fed move. Until 90 days, you probably get the whole impact, at the end of the that quarter or not, those 90 days on our, so that's a lagging index, okay, this is why. Why we came up with the, what our sense of the margin improvement might be. Then on our wholesale CD book, which is around a half a billion dollars, those usually are 90-day resets. So, you're not going to see the impact of that until, the full impact, a quarterly impact if you will, you know.

For 90 days, but they're all kind of, they're not all maturing at the same time. So, that impact it kind of rolls in during the quarter. So we the number or the guidance that we gave you that Heather gave you is really like a clean, okay, what happens at this cut, maybe a quarter down the road, what's the impact going to be? Does that make sense?

Yeah, I understand. So just, it's based on the maturity of the deposits and once you kind of fully get those through that that would get you the 850. Great, okay, Got it. Do you have, handy just the spot interest-bearing deposit cost at 9:30? Yeah, that was 240.And then on the page 22 disclosure on the adjustable-rate repricing, I appreciate you guys adding that in there. Just the $363 million of adjustable that come up in 2026, they're at a 435 rate today.

If those were to reprice, in today's rate environment, where would the new yields be at? I'm just trying to gauge, that repricing benefit to to the margin James we've talked about. It seems like it'd be a pretty decent [tailwind].

Yeah, it's probably around 180 to 200 over that, so it's really, our spreads are usually 275 to 3.25%, so you look at the 5 years today. It's 3 and what was it 3 what was it.

350,361.

361 and add that on top of it. That's kind of where I think it would end up. Pretty decent pick up, yeah, pretty decent.

Okay, and then last one for me, James, we're seeing quite an acceleration in in M&A, maybe not as much in California as in other geographies, but, you've got what's a pretty strong currency now with the stock prices trading, just talk about your views on M&A and I know you've obviously got a very healthy organic growth engine, probably not pressed for M&A, but just talk about your views on the landscape right now.

Well, it was a pretty active, Monday, I'll say that much, with first foundation trading, they have some operations up in around us, and then the big deal when. When cadence sold out, so those are. I go to these conferences, Andrew, and I know these CEOs and so they're, they made a decision to sell, so, from an M&A perspective, where we sit, we've grown. I don't know, 600 million so far this year, Andrew. That that used to be a size of a bank in California. I think the average size in California is probably a billion now, right? But so, we've been pretty, we don't need to buy anybody [per] se.

And. There are, there could be opportunities that are out there, and we always want to be able to take advantage of something that comes up. And it's we lean organic most definitely we lean organic and as we continue to grow and develop, we become, especially where our evaluation is right now the more fit, more able acquirer, so, there's nothing on the horizon for us right now. We're going into our planning session here in November and certainly this is always a topic of conversation, so where we sit on it is that.

We could be we could do something, but it would have to be just a great deal for us and very opportunistic and deal with something that we feel like we need maybe to a little help on and it's and if we need a little help with anything, it's probably on the granularity on our deposit side, but and then a lower cost of funds if you will, somebody who's got a lot of non-interest-bearing deposits, but we're doing fine there. We're seeing very solid growth in that particular line item in our liabilities.

So, I've been, I'm all over the map on this response, but, we're really driving what we're doing right now organically. But like you never, and none of our board wants to rule out a an M&A deal, but that's kind of where we, that's where we sit.

Yeah, great, I appreciate the color and yeah, high bar growing 600 million this year. Great work and thanks for taking the questions.

Thank you.

(Operator Instructions) Gary Tenner, D.A. Davidson - Analyst

Thanks. Good morning. I had another question just on the as you were going through some of the deposit buckets and so forth, just on the on the money market book, what type of data were you able to push through when you know we have the September cut and you know what are your expectations I guess for out this week.

Yeah, when we did that we were about 30% beta overall.

Yeah.

Overall and then 26%, yeah.

Yeah, so but we'll tell you, Gary, so we're going to take any deposit relationship that's. That is outside of our CD book that's price. 225 basis points and higher. We're going to take on that day, we're going to take, a 100% cut on those deposits. And that equates to around1.4 billion. So, certain type of accounts like high yield money market accounts are going to have a 100% beta. But overall, It's About 30.

Okay, but I'd like for instance in that money market book then about 75%. Beta I guess effectively if you because most of that 1.4 billion of higher yielding non-CDs would be in that book, right?

Yes sir.

Okay, great, and then. Just on the topic of, expansion and hiring, are you seeing it becoming more competitive or more challenging to recruit? Are there more banks in your footprint following that playbook now? I mean, we're seeing it. In other regions of the country where, like, every bank in the southeast is on these massive recruiting strategies, are you seeing that pick up and become more competitive About you?

Yeah, I, we are. And so, it all depends on what, whose platform is out there recruiting. A lot of the folks that we compete against don't have our performance, don't have our reputation in the marketplace. So, we think we've got a competitive edge there when we do go up against people and folks and for, bringing on experienced bankers. So, we think if we really want somebody, we'll be able to get them, but it is more competitive, most certainly, there are options. And if people are looking to grow, and if they can pick up a team, that it seems like more folks are doing it. Now, having said that, These bankers, and this is a phenomenon that's probably is not unique to California or very expensive.

And especially with folks that have been through, a process for the last 2-3 years, that have. Banks that have either been taken over, failed or taken over or just flat struggling in terms of trying to rationalize the investments they're making in these folks here in California. And so we see some opportunity coming out of that space, but what's happened is that these bankers have been bid up, so you have to be very careful of how much you want to pay, and you have to rationalize what are they going to be able to do for you. And so, these, those are the equations of the economics that we go through when we're thinking about picking up a team. But to answer basic question, the answer is yes, it is more competitive.

Very well, I appreciate the extended thoughts on that.Thank you.

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

Thank you. It is 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 upon a legacy of superior community banking in the capital region and North state, we answer the call of businesses and organizations.

Who desired a time-honoured 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 us. And we believe in them. It is 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 January to discuss earnings for the fourth quarter of 2025. Have a great day and thank you for listening. The conference is now concluded.

Thank you for attending today's presentation. You may now disconnect.