Q3 2025 Five Star Bancorp Earnings Call
Operator: I would now like to turn the presentation over to James Beckwith, Five Star Bancorp President and CEO. Please go ahead.
James Beckwith: Thank you for joining us to review Five Star Bancorp's financial results for the third 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. 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.
The release is available on our website at five Star Bank Dot 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 our <unk> 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 <unk> 77.
Return on average assets of 144% and return on average equity of $15 three 5%.
Our net interest margin expanded three basis points to three 5% to 6% and our cost of total deposits declined by two basis points to 244%.
Our efficiency ratio was 41, 3% for the third quarter.
James Beckwith: 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 remained 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.
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 nonperforming loans, representing only five 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 dividend of <unk> 20 per share on the company's common stock expected to be paid in November.
We continue to deliver value to our shareholders.
James Beckwith: 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 loan pipeline remained strong. The credit quality of loans remained 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.
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 loan pipeline remained strong.
The credit quality of loans remained 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 nonperforming loans, which declined by 149000 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 a result of growth in interest bearing and noninterest bearing deposits related to new accounts.
The new interest bearing deposit accounts contributed $171 $6 million of overall growth.
New noninterest bearing deposits contributed to $28 8 million of overall growth.
James Beckwith: Non-interest-bearing deposits remained 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 a stable funding base for our future growth. I will hand it over to Heather to present the results of operations. Heather?
Noninterest bearing deposits remained consistent at 26% of total deposits.
As of September 32025.
Approximately 60% of our deposit relationships totaled more than $5 million.
These deposits have a long tenure with the bank with an average age of eight 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.
Heather Luck: Thank you, James, and hello everyone. Net interest income increased $2.8 million from the previous quarter, primarily due to a $4.3 million 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 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.
Jane and Hello, everyone.
Net interest income increased $2 8 million from the previous quarter, primarily due to a $4 3 million 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 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.
Noninterest 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 32025.
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.
Heather Luck: 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. I'll hand it back to James for closing remarks. James?
Noninterest expense grew by 900000 in the three months ended September 32025.
This is primarily due to an increase in salaries and employee benefits related to increased head count to support customer facing and back office operation.
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.
Okay.
James Beckwith: Thank you, Heather. During the quarter, we opened our ninth 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 in 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's 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.
Thank you Heather.
During the quarter, we opened our ninth 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 of deposits as of September 32025.
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.
Our clients benefit from our global trade services and exceptional Treasury management tools.
Five Star Bank success serves as a strong testimony to clients who value our team of committed professionals, who provide authentic relationship based service we.
We continue to ensure our technology stack operating efficiencies.
<unk> underwriting practices exceptional credit quality and a prudent approach to portfolio management will benefit our customers employees community and shareholders.
James Beckwith: 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.
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.
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 for 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: We will now begin the question and answer session. To ask a question, those dialed in may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Questions will be taken in the order received. Our first question today is from David Feaster with Raymond James. Please go ahead.
We will now begin the question and answer session.
To ask a question those out in May Press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Questions will be taken in the order received.
Our first question today is from David Feaster with Raymond James. Please go ahead.
[Analyst 1]: Hi, good morning, everybody.
Hi, good morning, everybody.
James Beckwith: Hey, David. How are you doing?
Hey, David how are you doing.
[Analyst 1]: I am great. I wanted to start on the deposit front. I mean, perhaps that in my mind, perhaps the core deposit growth that you saw was one of the most impressive parts about the quarter. You know, you decreased 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.
Hi, 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.
Kris 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.
James Beckwith: Third quarter, David, was exceptional. It was a lot of things went our way in terms of new clients, which we're very excited about. We saw growth across our platforms in all of our geographies, so that was very exciting. I think that to replicate that type of quarter again, David, is going to be pretty difficult when we say that. 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. 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. I think the third quarter was very strong. I say that because we're still trying to deal with our broker deposits that we have.
Well certainly third quarter, David was exceptional.
And.
It was a lot of things went our way.
In terms of new clients, which.
Which we're very excited about and we saw growth across our platforms in all of our geographies.
So that was very exciting I think.
To replicate that type of quarter against David is going to be pretty difficult when we say that.
But.
We were pretty happy about where we.
Where we ended up now.
Deposit pipeline just like our.
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 and I say that because we.
We're still.
We're still trying to deal with there are broker deposits that we have we have a long term.
James Beckwith: We have a long-term desire to eliminate those, and we're making progress. We made very substantial progress in the third quarter. We'll just have to see how the fourth quarter goes. 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.
Desire to eliminate those and we're making progress we made very substantial progress in the third quarter and we will just have to see how the fourth quarter goes.
So that probably will have an impact in terms of eliminating overall deposit growth to the extent that we pay any of those often 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.
[Analyst 1]: Okay. The reason for that is just the continued optimization of the deposit phase, because you're still going to be driving core deposit growth. I just want to make sure that I'm understanding that right. Still driving core deposit growth, but using that to pay down broke.
Okay, but and the reason for that is just the continued optimization of the deposit base. Because you are still going to be driving core deposit them I just want to make sure that I'm understanding that right.
It's still driving core deposit growth, but using that to pay down broker.
James Beckwith: Yeah.
Yep.
[Analyst 1]: Okay.
Okay.
James Beckwith: We're anticipating a 1%. Go ahead.
The pending.
Go ahead, yeah, perfect and then maybe switching gears to the loan side originations were strong the pipelines still robust.
[Analyst 1]: Perfect. Maybe switching gears to the loan side, originations were strong. The pipeline's still robust, but payouts and paydowns are still a pretty material headwind. I think it's the second highest level that I can see back over the past several years. I wanted to first get a sense of what's driving these payouts and paydowns. How much is it losing deals to competitors, through refis or whatever, asset sales, or just deleveraging? How do you think about payoff and paydown activity going forward as rates continue to decline? Is that going to remain a pretty material headwind?
But payoffs and pay downs are still a pretty material headwind I think it's the second highest level.
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 paydowns how much is it.
Losing deals to competitors.
The refis or whatever asset sales are just deleveraging and then how do you think about payoff and paydown activity going forward as rates continue to decline is that going to remain a pretty material headwind.
James Beckwith: In part, it's our business model with respect to our manufactured housing communities and RV business, David. You know, we anticipated being in these deals three to four years, before our clients will either sell the properties or take their long-term financing to agency. 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 typically lend on a five-year, fixed-rate basis, it'll adjust after this, the rate, the yield will adjust after the 60th month. A lot of that's starting to come through on those originations that were done in 2020, particularly in 2020. We'll see some more of that in 2021, 2026, and 2027 for originations in 2021 and 2022.
Well in part.
Our business model with respect to our Omics MHC and RV business, David we anticipated being in these deals three to four years.
Before our clients will either sell the properties or take there.
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 <unk>.
<unk> not necessarily maturing, but having their rates reset when because we're typically.
We lend on a five year.
Fixed rate basis, and it will adjust after the rate the yield will adjust after the $60 a month.
So a lot of that starting to come through on those originations that were done in 'twenty, particularly in 'twenty and we will see some more of that in 'twenty one.
26%, 27% for originations in 'twenty, one and 'twenty two so.
James Beckwith: It's just really the nature of our business. There's nothing that we think is unusual about it. We recognize that we have to stay ahead of it. We've got the horses to do that. That's why we will continue to build our balances. We're not necessarily losing deals to anybody. We like to think that we're the quickest gnome in town. If somebody else wants to do a deal, that's fine, but we like the model. The model is working exactly 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.
Really the nature of our business. There is nothing that we think is unusual about it.
We recognize that we have to stay ahead of it we've got the horses to do that.
So thats why those.
We will continue to build our balances.
So we're not necessarily losing deals to anybody.
We.
We like to think that we're the quickest know in town if somebody else wants to do a deal Thats fine.
But we're we like the model the model is working exactly 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.
[Analyst 1]: That makes sense. With that, you talked about having the team and the horsepower to continue to outpace payoffs and paydowns. You've been really active hiring. You recently hired the ag team. I guess first wanted to just get an update on where, as you think about growth, where are you seeing the growth opportunity, the growth opportunities today. Kind of an update on the ag team, what they're seeing. Are there any other segments like that that you might be interested in expanding into organically, and hire or lift out a team? Just kind of curious what you're seeing on that front.
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 Paydowns.
Been really active hiring.
Recently hired the AG team.
I guess first wanted to just get an update on <unk>.
As you think about growth where are you seeing the gross opportunity the growth opportunity today kind of an update on the AG team, what theyre seeing and are there any other segments like that that you might be interested in expanding into organically.
And hire a lift out of teams just kind of curious what youre seeing on that front.
James Beckwith: Yeah, you know, let's just talk about the ag 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. You know, the credits and the relationships are quite substantial. To call them granular would be a complete misnomer. When we board them, they do move the needle because they're larger deals, both on the deposit side and on the loan side. 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, you know, where we stand in that. The sales cycle in that business can be long sometimes, you know, over two or three years, two or three seasons. We're very committed to it, number one.
Yeah.
Let's just talk about the AG team, we booked some good credits, we anticipating booking some very large credits in the fourth quarter very active in the market. We're.
We're excited where that business is going.
The credits and the relationships are quite substantial.
To call them granular would be a big complete misnomer and when we when we bought them and they do move the needle because theyre larger deals both on the deposit side and on the <unk>.
One side, but we like where we're doing that we're making some penetration.
In markets people know.
We are beginning to know that we're serious.
And we're excited about where we stand in that.
The sales cycle in that businesses can be long sometimes.
Over two to three years two years or three season. So we're we're very committed to it number one we continue to see growth in our MFC and RV business and we continue to add core clients in the space.
James Beckwith: We continue to see growth in our manufactured housing communities and RV business. We continue to add core clients in the space, and our clients are still, our existing clients are still buying parks. We're excited about where that business is going. Our storage business seems to be very strong also. You know, RV, manufactured housing communities, storage is really a national platform. We're doing business across the United States. In fact, Heather, we file, what, tax returns in 27 different states?
And our clients are still our existing clients are still buying parks 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 filed our tax returns in 27 different states do so so we have nexus in all these states. So it's truly geographically diversified so David we expect to see continued.
Heather Luck: We do. That's correct.
James Beckwith: We have Nexus in all these states. It's truly geographically diversified. David, we expect to see continued growth in that particular segment. From a geographic perspective, our Bay Area loan pipeline remains very strong. That's made up of commercial and industrial loans and also commercial real estate lending. We've done a lot of student housing deals in the Berkeley area, and we will continue to look for opportunities there. That's strong. Our construction industries group continues to perform well, and that's primarily a deposit play. We're excited where that business is going. Our faith-based business is having a very good year. We expect that to continue to grow. Our nonprofit business is very robust, particularly in the Bay Area. We like where that's going.
<unk> growth in that particular segment.
From a geographic perspective.
In our Bay area loan pipeline remains very strong and Thats made up of C&I and also CRE lending.
Done a lot of student housing deals.
And the Berkley area, and we will continue to look for opportunities there.
So that strong are our construction industries group continues to perform well and Thats, primarily a deposit play.
So we're excited.
That business is growing our fee based businesses.
Is having a good year very good year, we expect that to continue to grow our nonprofit business is very robust, particularly in the bay area. So we like where that's going.
James Beckwith: Of course, our government book, in which, David, we focus on small districts, small special districts, if you will, we've seen a lot of success in that space. Again, that's primarily deposit-driven. Across the platform, our verticals and our geographies seem to be performing very well, and their prospects are strong.
And then of course, our government book in which David we focus on small districts small special districts. If you will.
We've seen a lot of success in that space and again Thats primarily deposit driven.
So.
Across the platform we seem to be.
And geographies or verticals and our geographies seem to be performing very well and their prospects are strong.
[Analyst 1]: That's very helpful. Thank you.
That's very helpful. Thank you.
Operator: The next question is from Woody Lay with KBW. Please go ahead.
The next question is from Woody lay with <unk>. Please go ahead.
[Analyst 2]: Hey, thanks for taking my questions. I wanted to start.
Hey, Thanks for taking my question.
Wanted to start.
James Beckwith: Hey.
Wanted to start on the net interest margin outlook.
[Analyst 2]: Hey. 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. 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?
If I just look at your balance sheet. It would seem that you're set up pretty well for a down rate environment. So how should we think.
Based on the most recent cut in the expectation for additional cuts from here how should we think about the earnings power there.
James Beckwith: We think it's pretty good. You know, we recognize we are near-term liability-sensitive. That could, you know, one 25 basis point cut, Heather, over a quarter would mean, what?
Well, we think it's we think it's pretty good.
We recognize we have a near term.
Near term liability sensitive.
That could 111 25 basis point cut Heather over a quarter would mean, what about 850000 of improvement.
Heather Luck: About $850,000 of improvement. Yeah.
James Beckwith: We see some expansion in our margin that's potential in the fourth quarter. You know, one to three basis points, pretty consistent with what we've seen in the second to the third quarter. Maybe we can do a little bit better in that, but that's kind of what our sense of it is right now. We continue to see loan repricings in our loan portfolio. Sooner or later, we're going to run out of that, as all those loans reset. In the near term, it looks pretty decent for us. We see continued margin expansion with these rate cuts. You know, you could tell, Woody, that our cost of funds is noticeably higher than our peers. That's because we do pay up for deposits.
So we see some expansion in our margin this potential and in the fourth quarter, one to three basis points pretty consistent with what we've seen.
And the.
The second to 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 in our loan portfolio sooner or later, we're going to run out of that.
Those all of those loans reset.
But the near term it looks pretty decent for us. So we see continued margin expansion.
With these rate cuts.
You can tell.
Our cost of funds is noticeably higher than our peers and thats, because we do pay up for deposits.
James Beckwith: In a down-rate environment, that's going to be to our benefit, not only in our money market book, but also in our government book, and to some extent in our wholesale CD book. We like the way that our balance sheet is constructed in a slight downward, down-rate environment.
In a down rate 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 that.
The way that our balance sheet is constructed in a slight downward down rate environment.
[Analyst 2]: Yeah, it definitely seems like a benefit. To the extent we get these additional rate cuts, get the NIM benefit, do you think it drives positive operating leverage, or does it give an opportunity to keep reinvesting in some of the, you know, in the Bay Area expansion market and some of these new business lines? How do you think about the toggle there?
Yes, yes, it definitely seems like a benefit.
To the extent, we get these additional rate cuts get the NIM benefit.
Do you think would drive positive operating leverage or does it give an opportunity to keep reinvesting in some of the.
In the Bay area expansion market in 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.
James Beckwith: We've been pretty active in terms of bringing on very talented yet high-priced bankers. You know, our plans on a go-forward basis, right now, with Heather, we got 41 biz dev people right now.
Very talented yet high priced.
Bankers and.
We our plans on a go forward basis right now with Heather We've got 41 Biz Dev people right now we're going to have a new one join US next week.
Heather Luck: Yep.
James Beckwith: We're going to have a new one join us next week. 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 two years or even a year ago. We like to think we've got this balance between earnings growth and reinvesting back into our business. It's, you know, 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. You know, we're playing the long game here in terms of 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.
We're going to continue to look for opportunities to get talent.
Because its out there there is still out there maybe not out there to the same extent as it was.
Two years or even a year ago, but.
We we like to think we've got this balance between earnings growth and reinvesting reinvesting back into our business.
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.
That way of doing business.
[Analyst 2]: No, that's really helpful. 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 remix opportunities. Could you just remind us sort of where you aim to target that longer term?
No. 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 Theres, some broker deposit remix opportunities.
So could you just.
Remind us sort of where you aim to target that longer term.
James Beckwith: I think that, you know, 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 it might be less. I don't know how far less, but if there was a bias, it'd probably be higher. We do target 95% as something where we're comfortable at. You know, running, you can run hot at, you know, 100, north of 100, but that's nothing that we think that we'd want to do year in and year out.
Well I think that.
We're comfortable at 95% that's kind of a line that will.
Look at every month with our board.
And.
That's a good target for us sometimes it might be higher sometimes.
Might be less I don't know how far less but.
If there is a bias would probably be higher but we do target, 95% is something where we're comfortable at.
Brian you can run hot 100, north of 100, but thats.
Nothing that we think that we would want to do year in and year out.
[Analyst 2]: Got it. All right. Thanks for taking my questions. Congrats on the good quarter.
Got it alright, well thanks for taking my questions Congrats on the good quarter.
James Beckwith: Thanks so much.
Thanks, so much.
Operator: The next question is from Andrew Terrell with Stephens. Please go ahead.
The next question is from Andrew <unk> with Stephens. Please go ahead.
[Analyst 3]: Hey, good morning.
Hey, good morning.
James Beckwith: Hey, Andrew.
Hey, Andrew.
[Analyst 3]: Maybe, Heather, I wanted to go back to some of the margin really quick. I think, did you say $850,000 positive pickup for each 25 basis point cut? Was that right?
Maybe one other I wanted to go back to some of the margin really quick I think did you say 850000 positive pick up for each 25 basis point cut was that right.
Heather Luck: Yeah, for the full quarter, though, because it'll take some time for our wholesale book to reprice. It'll take a full quarter to see the full effect. Immediate is more than 200 for immediate repricing net.
For the full quarter, though because it will take some time for our wholesale book to reprice.
Yes, I think a full quarter of athene all of that yes, and yes.
Good morning.
200 for immediate repricing.
Yes, I guess I'm just trying to think through that you mentioned margin up one to three in the fourth quarter 850000.
[Analyst 3]: Yeah, I guess I'm just trying to think through the, you mentioned the margin of 1 to 3 in the fourth quarter. $850,000 is, you know, seven, eight basis points of margin. We'll get the full quarter of the September cut in the fourth quarter. It looks like in October and maybe a December cut as well that, you know, it feels like the margin should just be up more than 1 to 3 basis points. I'm trying to ask, you know, what are maybe some of the puts and takes to the margin in the fourth quarter that could limit what feels like should be a decent bias higher?
700 basis points of margin, we will get the full quarter at the September cut in the fourth quarter and then it looks like in October and maybe a December cut as well.
Yes, it feels like the margins should be up more than one to three basis points. So I guess I'm trying to ask what are maybe some of the puts and takes time.
So the margin in the fourth quarter that could limit.
Well it feels like it should be a decent <unk>.
So I'm going to weigh in on this if you won't mind Heather so.
James Beckwith: I'm going to weigh in on this if you don't mind, Heather. Andrew, in our government deposit book, it's driven by LAIF, Local Area Investment Fund rates. Those change every month. You really don't see an impact of a Fed move until 90 days. You probably get the whole impact at the end of that quarter or those 90 days. On our wholesale CD book, which is around $500 million, those usually are 90-day resets. You're not going to see the impact of that until the full impact, a quarterly impact if you will, for 90 days.
Andrew.
Our government.
Deposit book.
It's driven by Leif local area investment fund rates and those change every month.
So you really really don't see an impact of a fed move.
Until 90 days, you would probably get the whole impact at the end of the quarter or not.
Those 90 days on our so that's a lagging index.
This is why.
Why we came up with what our sense of the margin improvement might be.
Then on our wholesale CD book, which is around a $5 billion.
Those are usually or a 90 day resets, so youre not going to see the impact of that until the full impact of quarterly impact if you will.
For 90 days.
Heather Luck: You know.
Okay.
James Beckwith: They're all kind of, they're not all maturing at the same time. That impact, it kind of rolls in during a quarter. 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?
They're all kind of theyre not all maturing at the same time, so that impact kind of rolls in during the quarter. So the number or the guidance that we gave you that Heather gave you is really like a clean okay. What happens that this cut maybe a quarter down the road, what's the impact going to be does that makes sense.
[Analyst 3]: Yeah, I understand. It's based on the maturity of the deposits, and once you kind of fully get those through, that would get you to the $850?
Yes, yes, I understand sir.
It's based on the maturity of the deposits and once you kind of fully go through that that would get you there.
James Beckwith: Correct. Yes, sir.
Great Okay, yes, Sir.
[Analyst 3]: Okay. Got it. Do you have handy just the spot interest-bearing deposit cost at 9:30?
Got it.
Do you have handy just the spot interest bearing deposit costs at 930.
Heather Luck: Yeah, that was $240.
Yes that was 240 <unk>.
Q2 total.
[Analyst 3]: 240. Okay, 240 total. Gotcha. On the page 22 disclosure around the adjustable rate repricing, I appreciate you guys adding that in there. Just the $363 million of adjustables that come up in 2026, they're at a 4.35% 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 the margin, James, that we've talked about. It seems like it'd be a pretty decent tailwind.
Got you.
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 adjustables that.
Come up in 2020.
435 rate today.
If those warrants were repriced in today's rate environment, where would the new yields I'm just trying to gauge.
That repricing benefit to the margin James and we've talked about it seems like it would be a pretty pretty decent tailwind.
James Beckwith: Yeah, it's probably around $180 to $200 over that. It's really, you know, our spreads are usually 275 to 3.25. You look at the five-year today, it's 3, and what was it? 3, what was it? 3.50?
Yes.
Probably around 180 to 200 over that so it's really where spreads are usually $2 75 to three in a quarter.
So when you look at the five year today.
It's three and when was it.
What it was at $3 50 361.
[Analyst 3]: 361.
James Beckwith: Add that on top of it. That's kind of where I think it would end up.
361, and add add that on top of it.
That's kind of where where I think it would end up.
[Analyst 3]: Okay. gotcha.
Okay.
James Beckwith: There's a pretty decent pickup. Yeah, right, right, pretty decent pickup.
Now there are some pretty decent pick up yes.
Yes, right pretty decent.
[Analyst 3]: Okay. Last one for me, you know, James, we're seeing quite an acceleration 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. 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.
Okay, and then last one for me.
James we're seeing quite an acceleration in M&A, maybe not as much in California.
In other geographies, but.
<unk> got a.
A pretty strong currency now.
When the stock prices trading just talk about your views on M&A and I know you've 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.
James Beckwith: It was a pretty active Monday, I'll say that much, with First Foundation trading. They have some operations up and around us. The big deal was when Cadence sold out. I go to these conferences, Andrew, and I know these CEOs, and they made a decision to sell. From an M&A perspective, where we sit, we've grown, I don't know, $600 million so far this year, Andrew. That used to be the size of a bank in California. I think the average size in California is probably $1 billion now, right? We've been pretty, we don't need to buy anybody per se. There could be opportunities that are out there, and we always want to be able to take advantage of something that comes up. Is it, we lean organic, most definitely. We lean organic.
Well it was a pretty active Monday, I'll say that much.
First foundation trading they have some operations up around us.
The big deal win.
When cadence sold out so those are.
I go to these conferences, Andrew and I know these Ceos and so.
Sure.
They've made a decision to sell.
So.
<unk>.
From an M&A perspective, where we sit we've grown.
I don't know $600 million, so far this year Andrew.
That used to be the size of a bank in California, I think the average size in California's probably 1 billion now right.
So we've been pretty we don't need to buy anybody per se.
In.
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.
<unk>.
Is it.
We lean organic most definitely we lean organic and as we continue to grow and develop.
James Beckwith: As we continue to grow and develop, we become, especially where our valuation is right now, a more fit, more able acquirer. There is 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. Where we sit on it is that we could do something, but it'd have to be just a great deal for us and very opportunistic and deal with something that we feel like we need, maybe a little help on. If we need a little help with anything, it's probably on the granularity on our deposit side, and then a lower cost of funds, if you will. Somebody who's got a lot of non-interest-bearing deposits. We're doing fine there. We're seeing very solid growth in that particular line item in our liabilities.
We become.
Especially where our valuation is right now.
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 there 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 if we need a little help with anything its probably on our granularity on our deposit side, but.
And then a lower cost of funds. If you will somebody who has got a lot of noninterest bearing deposits, but we're doing fine there we're seeing very solid growth in that in that particular line item in our liabilities.
James Beckwith: I'm all over the map on this response, but we're really driving what we're doing right now organically. None of our board wants to rule out an M&A deal. That's kind of where we sit.
So.
I mean I'm all over the map on this response, but we're really driving what we're doing right now organically, but like.
And none of our board wants to rollout an M&A deal.
But that's kind of where we that's where we sit.
[Analyst 3]: Great. I appreciate the color. High bar, growing $600 million this year. Great work, and thanks for taking the questions.
Great I appreciate the color on yes, hi, Barak run $600 million us here.
Framework and thanks for taking the questions.
James Beckwith: Thank you.
Thank you.
Operator: Again, if you have a question, please press star, then one. The next question is from Gary Tenner with D.A. Davidson. Please go ahead.
Again, if you have a question. Please press Star then one.
The next question is from Gary Tenner with D. A Davidson. Please go ahead.
[Analyst 4]: 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 money market book, what type of beta were you able to push through when, you know, we had the September cut? What are your expectations, I guess, for a cut this week?
Thanks, Good morning.
Had another question just on the deposit were going through some of the deposit buckets.
And so far it just on the on the money market book.
What type of data, where you're able to push through one.
We had the September cut and what are your expectations I guess worked out this week.
Heather Luck: Yeah, when we did that, we were about 30% beta.
Yes, when we did that there are about 30% of data overall overall.
[Analyst 4]: Overall?
Heather Luck: Yeah, overall.
[Analyst 4]: Overall.
Heather Luck: Twenty-six percent. Yeah, yeah.
And then 26%.
James Beckwith: We'll tell you, Gary, we're going to take any deposit relationship that's, you know, that is outside of our CD book that's priced 225 basis points and higher. We're going to take on that day, we're going to take a 100% cut on those deposits. That equates to around.
Yes, So we'll tell you.
Gary So we're going to take any deposit relationship.
<unk>.
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 it one.
100% cut on those.
On those those deposits.
And that equates to around $1 4 billion to $1 4 billion.
Heather Luck: 1.4 billion.
James Beckwith: $1.4 billion. Certain types of accounts like high-yield money market accounts are going to have 100% beta, but overall, it's.
So.
Certain type of accounts like high yield money market accounts are going to have a 100% data.
Sure.
But overall, it's about 30 up 30.
Heather Luck: About 30.
James Beckwith: About 30?
Heather Luck: Yeah.
[Analyst 4]: Okay. 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?
Okay, but like for instance in that money market book them.
About 75%.
Beta I guess effectively because most of that $1 4 billion.
Of higher gasoline non CD is would be in that box right.
James Beckwith: Yes, sir.
Yes, Sir okay.
[Analyst 4]: Okay, great. On the topic of expansion and hiring, are you seeing it becoming more competitive and 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 every bank in the Southeast is on these massive recruiting strategies. Are you seeing that pick up and become more competitive by you?
Okay, Okay great.
And then.
Just on the topic of <unk>.
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 we're seeing it.
In other regions of the country, where every bank in the southeast is on these massive recruiting.
Strategies are you seeing that pick up and become more and more competitive.
Got you.
Yeah.
James Beckwith: Yeah, we are. It all depends on 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. We think we've got a competitive edge there when we do go up against people and folks for bringing on experienced bankers. We think if we really want somebody, we'll be able to get them. It is more competitive, most certainly. There are options. If people are looking to grow, and if they can pick up a team, it seems like more folks are doing it.
We are.
And so.
It all depends on what whose platform is out there recruiting.
A lot a lot of the folks that we compete against don't 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 in.
For bringing on experienced bankers.
So we think if we really want somebody will be able to get them, but it is it is more competitive.
Most certainly there are options.
People are looking to grow.
And if they can pick up a team.
It seems like more folks are doing it now having said that.
James Beckwith: Now, having said that, these bankers, and this is a phenomenon that's probably not unique to California, are very expensive, especially with folks that have been through a process for the last two, three years, that have banks that have either been taken over, excuse me, failed or taken over, or are just flat struggling in terms of trying to rationalize the investments they're making in these folks here in California. We see some opportunity coming out of that space. What’s happened is that these bankers have been bid up. You have to be very careful of how much you want to pay. You have to rationalize what are they going to be able to do for you. Those are the equations or the economics that we go through when we're thinking about picking up a team. To answer your basic question, the answer is yes. It is more competitive.
<unk>.
These bankers and this is a phenomenon thats drop is not unique to California or very expensive.
And especially with folks that have been through.
Sure.
Our process for the last two three years.
That.
Thanks that either have been taken over.
Excuse me failed or taken over or just flat struggling in terms of trying to rationalize the investments that we're making in these folks here in California.
So we see some opportunity coming out of that space.
But whats happened is that these bankers have been bid up so you have to be very careful of how much you want to pay.
You have to rationalize whether they are going to be able to do for you.
And so those are the equations are the economics that we go through.
When we're thinking about picking up the team but to answer your basic question and the answer is yes. It is more competitive.
[Analyst 4]: Very well. I appreciate the extended thoughts on that. Thank you.
Alright, well I appreciate the extended thoughts on that.
Okay.
Okay.
Operator: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
James Beckwith: 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 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 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 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.
Thank you it is with deep appreciation and gratitude.
That we have advocated for our clients and champion the communities. We serve we will always will as our expansion in the San Francisco Bay area continues.
And as we build upon our legacy of superior community banking in the capital region, and what state we answer the call of businesses and organizations.
Who desire a time honoured banking partner.
Five Star Bank Corp is here to stay we are proud to have experienced another quarter of significant organic growth Bill.
Built upon a sturdy foundation of client service.
Banded relationships and products and the loyalty of our exceptional clients.
We will always remember that we exist because of our clients Trust us and.
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.
James Beckwith: 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.
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.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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