Q2 2025 Five Star Bancorp Earnings Call
Welcome to the 5-star Bank Court. 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.
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so, withdraw your questions, you may press star and 2
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 risk, and uncertainty, 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 31st 2024 and the quarterly report on form 10q for the 3-month and the March 30th 2025. And in particular, the information set forth and item 1, a risk factors in those reports.
Please refer to slide 2 of the presentation which includes disclaimers regarding forward-looking statements industry data. Un audited financial data and non-gaap financial information included in this presentation.
Reconciliations of non-gaap financial measures to the 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.
We also know today's event is being recorded.
At this time I'd like to turn the presentation over to James. Beckwith, 5-star bore president and CEO. Please go ahead.
Thank you for joining us to review. 5-star Bank Corps Financial results for the second quarter of 2025, which were released yesterday.
The release is available on our website at 5 Star bank.com under the investor relations tab.
Heather Luck: 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.
Heather Luck: Financial highlights during the second quarter included, 14.5 million of net income earnings per share of 68 cents.
Return on average assets of 1.37% and return on average Equity of 14.17%.
Heather Luck: Our net interest margin expanded by 8 basis points to 3.53% and our cost of total deposits declined by 2. Pesos points to 2.46%
Heather Luck: 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.
Heather Luck: the deposit growth was approximately 158.3 million or 17% on an annualized basis,
Heather Luck: our asset quality remains strong with non-performing. Loans representing only 6 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.
Heather Luck: On July 17th. Our board declared a cash dividend of 20 cents per share on the company's common stock expected to be paid in August.
Heather Luck: We continue to deliver value to our shareholders.
Heather Luck: Our total assets increased during the second quarter by 168.4 million larger. Largely driven by loan portfolio growth within our commercial real estate portfolio which group by 125.4 million
Heather Luck: Our loan pipeline remains strong.
The credit quality of our overall loan portfolio remains strong due to our conservative underwriting practices. Robust monitoring program throughout the life of a loan and our relationship-based approach to Lending
Heather Luck: As a result, we have a very low volume of non-performing loans.
Heather Luck: Increase was due to 1 commercial real estate loan being put on non-equal status during the quarter.
Heather Luck: We recorded a 2 and 1.5 million provision for credit losses during the quarter.
Heather Luck: The increase in our total liabilities. During the second quarter was primarily the result of increased both in 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.
Heather Luck: Pushing 87.4 million in New Balances.
Heather Luck: Non-interest bearing deposits was mainly driven by the opening of new accounts during the quarter pushing 6668.7 million in New Balance?
Heather Luck: Non-interest-bearing, deposits made up.
Heather Luck: 36% of total deposits as of June 30th 2025.
Heather Luck: An increase from 25%.
Heather Luck: 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.
Heather Luck: We believe our deposit portfolio to be a stable funding base for our future growth.
James Beckwith: Heather, thank you. James.
Heather Luck: Is that interest income increased?
Speaker Change: 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.
Speaker Change: This is partially offset by a million dollar increase in interest expense related to deposit growth.
Speaker Change: 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 3 months ended June 30th 2025.
Speaker Change: non-interest expense grew by 700,000 in the 3-month end of June 30 to increase in business travel conferences, training, and promotional expenses associated with the expansion of Business Development teams,
Speaker Change: This is partially offset by an increase in deferred loan origination costs.
Speaker Change: I'll now hand it back to James. Thank you, heather.
During the quarter, we announced the expansion of our expansion of our food and Agra business vertical.
Speaker Change: We also announced the expected opening of our Walnut Creek office in September of 2025 and added 5 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 4506.9 million in deposits as of June 30th 2025.
Speaker Change: 5-star bank has a reputation built on. Trust speed to serve and certainty of execution.
Speaker Change: All of which support our clients success.
Speaker Change: Our financial performance is the result of a truly differentiated client experience.
Speaker Change: Which continues to power, the demand for 5-star Banks relationship-based services.
Speaker Change: We are proud to have earned the trust and confidence of those, we serve including our shareholders.
Speaker Change: as we move into the third quarter of 2025,
Speaker Change: 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.
Speaker Change: the beneficiaries of our focused business approach are our clients, employees and community,
Speaker Change: we believe that if we support these constituents, well, our shareholders will realize the benefits.
Speaker Change: We appreciate your time today. This concludes today's presentation.
Speaker Change: Now, we will be happy to take any questions you might have.
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 1 on your telephone keypad,
Speaker Change: If you are using a speaker-phone, we do ask that you. Please pick up your handset before pressing the keys.
To withdraw your questions. You may press star into
questions will be taken in the order in which they are received.
Speaker Change: Our first question today comes from
David: David faster from Raymond, James, please go ahead with your question.
Good morning, everybody.
Speaker Change: Hey, good morning. David
Speaker Change: Um, 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. I mean, it is extremely impressive and I know it's not easy to do. Um, could you just touch on on where you're having success, obviously some in the Bay Area? Um, could you just touch on your, your thoughts on your ability to continue to drive core deposit growth? Um, and you know, the ability to reduce the deposit costs. I mean, is, is there much funding cost leverage left?
Well, um,
Speaker Change: Let me take the first part of your question first, if I could. Um so we saw growth across our entire platform, all of our verticals and all of our geographies
Speaker Change: and so, um,
you know, 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 business development officers now
Speaker Change: That are uh highly motivated uh very experienced and well-connected in the communities and the industries they serve.
So that's what's really driving this everybody had is having success.
um, and we were very supportive of those efforts, we spent a lot of time, personally, I spent a lot of time with them in terms of bringing in new relationships to the bank,
Speaker Change: From a funding cost perspective. I think we've kind of seen the end of uh you know, any effects of any rate cuts and I know we're all standing around at the uh
Speaker Change: Uh in the kitchen waiting for the FED to cut again but we're not really expecting that to happen. Um and we're not sure when that might happen but and we're not relying on that happening.
Speaker Change: I think you're seeing our funding costs. Uh will continue to maybe go down just a little bit more but it's really about the mix. Um you know and if the extent that we have uh very successful
Speaker Change: last half of 2025, in terms of raising non-interest bearing deposits, which we, we believe we've got some really great opportunities in our deposit pipeline, right now, to achieve that,
so it's it's really about fundamental execution, David and the fact that we just have so many feet on the street,
David: That's great. Um, and then, you know, maybe just touching on on the bay area maybe a bit more broadly. I mean, you've obviously had a, a, a lot of success in San Francisco. It's, it's been really impressive you. You've got the Walnut Creek office opening here soon. I'm, I'm curious. Maybe first of all, could you maybe touch on on the pulse of the Bay Area from your standpoint?
And I want opportunity to see left there in terms of both hiring and expansion in that market. Obviously, it's, it's a huge.
David: A huge Market but just kind of curious opportunities in the potential that you see in in the Bay Area.
David: Um sure uh we're excited about the Walnut Creek opening, I was there uh this week a couple days ago. Um,
David: And it the business environment in the Bay Area. It it's it's, it's changed in the last couple years. I mean, it just takes San Francisco, in particular, you know, there's a new mayor, their very energetic, uh, business-minded. Um, you know, I think that that city is turning around it. Just it's palpable in terms of uh, uh, just if you're just downtown in the financial district, you just get that sense.
David: Um, so I'm excited about that and while the creek is, is a beautiful place. I'm, uh, you know, it's got a great shopping district, uh, great food scene and it's growing, and it's it, it really is, I think done well, um, you know, just as a standalone, uh, area, uh, since you know, the pandemic and uh, and since why, what? I'll say, what you know what happened to San Francisco? You saw some, you've seen some migration out to the East Bay in particularly, uh, Walnut Creek. So we're excited about, you know what we're doing uh, in the Bay Area. Now future, um, expansion in the bay, I think you, you would probably expect it to see it down in the South Bay David. And uh, that's a
But anyway, that's how kind of we see it. Uh, we're not done, uh, expanding in the bay, uh, in the next expansion but certainly, um, outside of Walnut Creek will, probably be somewhere in the South Bay.
David: That's great. And then maybe last 1 for me. Uh, your Bot, your business model is obviously extremely scalable. You've done a great job driving pretty material revenue. Revenue growth with the infrastructure. You've got, you still continue to invest. I mean, we're sitting here with the low 40% efficiency ratio but the stage is set for continued. Outside loan, growth and revenue, growth potential for further margin expansion as we continue to re-price. The back book, um, is is a sub 40% efficiency ratio in the cards or are there other Investments or expenses that you may. Be accelerate just giving the strength you're seeing just kind of curious. How do you think about that?
David: Well we're very keen to continue to invest in our in our business. Um we did announce in the second quarter uh that we've
David: Um, uh, or expanding our food and Agra business business, and we've probably brought in some very seasoned professionals, uh, very experienced that have, uh, great connectivity to the space. And so we're continuing to invest in our business. These folks are
David: In mid-career and uh not necessarily inexpensive, let me say that much but we're happy to have them uh and we think we're going to expect great things. I I single that out, David just to but this is an example of how we continuously invest in our business and we're always looking to add Talent. Um so to achieve something that's sub 40. Uh,
David: you know, I
David: It's not necessarily A a goal per se but I could see it happening you know. We do have a lot of operating leverage in our business right now. Um so uh
We we'll see, we'll see what the rest of the year looks like. Yeah. And then David just to add on to that you know while while we have expanded um our headcount from a business development and customer facing side. We've also continued to build out our back office support teams as well. Um, so you know, in those me mixtures, you're seeing not only sales growth but you are seeing back office support as well. So for my perspective, there's no real significant Investments that we do need to make to either improve our technology or improve the support side. So really we're kind of just as we go adding more headcount to make sure that we're supporting our customers and staff as appropriate.
David: That's terrific. Thanks everybody. Great quarter.
Thank you so much David.
Speaker Change: Our next question comes from, what do you live from KBW? Please go ahead with your question.
Speaker Change: Hey, thanks for taking my questions. Um, maybe just 1 quick follow up on expenses. Just how should we think about the Run rate in the third quarter with the uh, walnut walnut creek office, uh, coming online?
Speaker Change: Yeah, I I would say add about 5 500,000 to about 750 for our next quarter. Um we we will have a little bit of increase expense for Walnut Creek, um so that should probably baked in enough for your estimate
Speaker Change: All right. Very, very helpful and then, uh, I had a follow up on deposits as well. And and the non-interest bearing segments, it's all 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, um, some wealthier clients and, and wasn't sure if it was kind of just a, a 1 quarter increase, or if you think that the jump up is sustainable from here,
Speaker Change: But we believe it's uh Woody, we believe it to be sustainable um and we as we continue to bring on new relationships.
Speaker Change: Uh, that, uh, all of which have some degree of some component of non-interest, bearing, uh, deposits in those relationships. So, we think that we'll continue to grow. There's nothing that per se that stands out, um, in terms of an anomaly at all. It's just it's growth of accounts. Number 1 in new accounts,
Speaker Change: all right, and then last for me,
Just looking at the growth in the quarter. It was, it was like it was mostly driven from the, uh, CRA bucket, and it was just curious on, you know, the the subvert verticals where you're seeing the best growth opportunities. And, and vice versa, maybe other uh verticals where you're not looking to grow at this time.
I, I think we're looking to grow all of our verticals, um, across the board. I mean we we continue to be very act with uh, active in the mobile home, park and RV park space along with storage.
For doing pretty well in in uh, and I'll say multi-family uh, student housing in particular. Uh, so those are areas that I think that we've, we've done a decent job on. Um, and we've also we've also financed, um,
Speaker Change: You know, I would say uh some uh Office Buildings. Now I don't want you to get all worried or anything Woody but these are, these are buildings in which uh there's new capital fresh Capital came to the table.
And, uh, and along with this massive reset that's going on. Uh, new Equity comes to the table, uh, price per square foot which now 250 to 350 a foot, as opposed to 900 to 1,000 a foot of what it was 5 years ago. And then we provided an appropriate amount of Leverage that with their 50 to 60%. So we fill those loans are incredibly safe and this is about the turnaround that we're seeing in in uh, I'm going to in particular in, uh, downtown San Francisco.
Speaker Change: so uh, you know, those particular
Speaker Change: Categories, I think kind of make up uh, a lot of the growth that we saw in our CRA portfolio.
All right, that's great. Caller. Thanks for taking my questions.
Speaker Change: Go ahead. Thank you.
Speaker Change: Our next question comes from Gary tener from VA Davidson, please go ahead with your question.
Speaker Change: Hey, good morning. I'm on the phone on for Gary here. Uh,
Speaker Change: Can you talk about? Can you give us a specific number on loan purchases? Then this quarter and what's in the docket for the next half of the year.
Speaker Change: Of loan purchases.
Speaker Change: Yep. Yeah, uh, see what we're doing. Um,
Is just maintaining our balance is that we've had. And I think we established this probably last third quarter or third quarter of last year. So we're running about, uh, we try to Target 300 million of, uh, what what, we call Bankers Health Group, um,
Speaker Change: purchases, not purchases, but outstanding balance and
Speaker Change: Because these loans advertise quickly, uh, we constantly have to uh, yeah. We we made during the quarter about 44 million in purchases, but really, that's just to keep the concentration within that 300 million range. So, you'll see purchases there, but it's just to renew payoff. Yes. So it's we're, we're targeting a, an average outstanding around 300 million in that in the what those loans.
Okay, uh, that makes sense. Thanks and great. Name expansion, this quarter. Uh, anything unusual in the loan yield expansion of 7 bibs
Speaker Change: No, it's just uh it's a combination of a bunch of different things. 1, you know, is our loan book continues to reprice uh most of the
Loans that we do or, you know, have 5 year resets on them in their in our commercial real estate space and so these loans that were put on in 2020 are now resetting. So they were resetting a very low
Speaker Change: From very low rates. So you have that impact.
Speaker Change: But you also have um you know all of our current production which is a much higher rate. So yeah um the Q2 production that we did had a wait
Speaker Change: For a 3%. So that was a nice pickup to the name. So that's how we've been able to expand. Um
You know, our yields in our uh, you know our loan portfolio, repricing 1. But you know it's uh but really new production is really driving it.
Speaker Change: That's great to hear. And last 1 for me uh on the tax rate outlook, for the remainder of 25 and Beyond uh with regards to the Neo, California, uh, tax law change, can you give us your outlook on that?
Speaker Change: Yeah, you for your modeling purposes, I would use a tax rate of like 26.83, that's our statutory rate. Um, we'll we're forecasting an effective tax rate of about 26.65, so that tends to fluctuate a little bit, depending on permanent items, but
Speaker Change: Within that range should be good for your model.
Speaker Change: Thanks.
Speaker Change: For taking my question, we were, we were very happy to see, uh, the governor signed that bill, by the way.
I see, okay.
I'm sure you were. Thank you.
Yes.
Speaker Change: And our next question comes from Andrew Terrell from Stevens. Please go ahead with your question.
Speaker Change: Hey uh, good morning. This is Jackson lorente on for Andrew Terrell.
Speaker Change: Hey Jackson.
Speaker Change: Uh, loan growth. Um, obviously growth was very impressive, this quarter and I believe we were talking to a 10 to 12 percentage, Trend in the back half of the year. Um, and if you're also still thinking about growth in the 10 to 12% range for the full year,
Speaker Change: Yeah, obviously we've uh, done a little better than that. Um but you know, when I look at our Pipeline and what I expect to pay off, um you know, I I still feel kind of comfortable in that particular range.
Speaker Change: We've got some large, uh, construction loans. That will probably pay off at some time in the next year, uh, and they're doing quite well. At least up is actually done really well.
Speaker Change: and uh, so we expect them to
Speaker Change: Probably get, uh, you know, put to bed with another shop. You know, probably, excuse me with an agency, excuse me, and an agency. Not another bank have it forbid. But um,
Speaker Change: Uh, so I'm I'm we're going to stick with that, you know, in terms of guide on both sides of the both sides of the balance sheet. Um,
Speaker Change: You know, which we think if we can achieve that low low teen growth, um, you know, we we think we're going to do quite well at the bottom line. Um, so
Speaker Change: Our, our pipelines are good. Very strong on for loan, Pipeline on, in our deposit line, uh, Pipelines.
Speaker Change: so, we're excited about that, but, uh, we think that that's a reasonable, uh, assumption in terms of growth as we move forward with the last half of 2025,
Got it. Uh, that's great. Keller, thank you. And then just lastly, for me, um, if you could give us a little bit more color on the new food and Agra in Agra business vertical, um, as well as just a little bit more about the team in place. And I know it's early Innings but would love to get a sense of like growth potentially you see from, uh, that business and Avenue growing forward?
Sure. Um,
Speaker Change: You know uh the group that we hired is led by a, a cliff Cooper. Uh he's got a very experienced team uh that he works with and they're going after large initially a large, large processors all types of egg Commodities uh that exists in the west coast. Um so these uh these credits and that uh that we're going after our cni um, Middle Market type of, uh, credits. Uh, companies whose Revenue could be
Speaker Change: 50 to half a billion. Um, and uh that have been in business for Generations.
Speaker Change: Um, this particular Market, we believe to be underserved by the majors. And so this is why we're stepping in here.
Speaker Change: California is a big, a state and for us being in, in California. Um, we were doing some add uh, prior to Cliff and team joining us. But we never felt like we were, uh,
Speaker Change: I'm going to say taking advantage of the opportunity and with cliff and his team. Uh, we see uh just a tremendous amount of opportunity 1 in terms of it'll help us maybe uh, balance out our loan portfolio. Uh, uh, uh, maybe, you know, over the long run. We'll, you know, be able to reduce our concentrations in commercial real estate, uh, if Cliff is successful. And we have every reason to believe he will be and, uh, uh, so we're we're very excited about that.
Speaker Change: Great. Uh thank you for the color. That's all I'll uh I had I'll step back
Thank you.
And 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
Thank you. Um, it's with deep appreciation and gratitude.
Speaker Change: That we have at advocated for our clients and Champion the communities. We serve. We are we always will
As our expansion in the San Francisco barrier Bay Area continues.
Speaker Change: and as we build on the legacy of of superior Community banking in the capital region and North State, we answer the call of businesses and organizations to desire a time-honored banking partner
5-star Bank Corp is here to stay.
Speaker Change: We are proud to have experienced another quarter of significant organic growth.
Speaker Change: Built upon a sturdy Foundation of client service.
Speaker Change: Ships and products.
Speaker Change: 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'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,
Speaker Change: Have a great day and thank you for listening.
Speaker Change: The conference has now concluded. We thank you for attending today's presentation.