Five Star sees $16.3 million net income and 21% increase in deposits, maintaining strong asset quality and growth outlook for future quarters.

OPERATOR - (00:01:55)

Welcome to the Five Star Third Quarter Earnings Webcast. Please note this is a closed conference call and you are encouraged to listen via the webcast. After today's presentation, there will be an opportunity for those provided with a dial-in number to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Before we get started, we would like to remind you that today's meeting will include some forward looking statements within the meaning of applicable securities laws. These forward looking statements relate to, among other things, current plans, expectations, events and industry trends that may affect the Company's future operating results and financial position. Such statements involve risks and uncertainties and future activities and results may differ materially from these expectations. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from the Company's forward looking statements, please see the Company's annual Reports on Form 10-K for the year ended December 31, 2024 and Quarterly Reports on Form 10-Q for the three months ended March 31, 2025 and June 30, 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 recent 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 President and CEO. Please go ahead.

James Beckwith - President and CEO - (00:04:07)

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@5starbank.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 three basis points to 3.56% and our cost of total deposits declined by two 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 loan pipeline remains 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 a 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 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 - Executive Vice President and Chief Financial Officer - (00:08:41)

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. 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 Beckwith - President and CEO - (00:10:22)

James 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 previous announced food, agribusiness and diversified industry business where clients benefit from our global trade services and exceptional treasury management tools. Five Star'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. 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 - (00:12:33)

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.

David Feaster - Equity Analyst - (00:13:02)

Hi. Good morning, everybody.

James Beckwith - President and CEO - (00:13:04)

Hey, David, how are you doing?

David Feaster - Equity Analyst - (00:13:06)

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 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.

James Beckwith - President and CEO - (00:13:33)

Well, certainly third quarter David was exceptional and it was a lot of things went our way in terms of new clients, which we were very excited about. And we saw growth across our platforms and all of our geographies. So that was very exciting. I think that to replicate that type of quarter again, David's going to be pretty difficult when you 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. And I say that because we're still, you know, we're still trying to deal with our broker deposits that we have, you know, 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.

David Feaster - Equity Analyst - (00:15:07)

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

James Beckwith - President and CEO - (00:15:20)

brokered deposits. Yeah.

David Feaster - Equity Analyst - (00:15:23)

Okay, so we're in the page.

James Beckwith - President and CEO - (00:15:27)

Go ahead.

David Feaster - Equity Analyst - (00:15:28)

Yep, perfect. And then maybe switching gears to the loan side. I mean, originations were strong, the pipelines, you know, still robust, you know, but payoffs and Pay downs are still a pretty material headwind. I think it's the second highest level that I, you know, as far as I've, I can see back, you know, over the past several years, you know, I guess I wanted to first get a sense of what's driving these payoffs and pay downs. You know, how much is it, you know, losing deals to competitors through refis 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?

James Beckwith - President and CEO - (00:16:11)

Well, in part, it's our business model with respect to manufactured housing communities (MHC) and recreational vehicle (RV) business, David. You know, we anticipated being in these deals, you know, three to four 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 five year fixed rate basis and it'll adjust after this. The rate 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, you know, 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. So that's why those, you know, 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 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.

David Feaster - Equity Analyst - (00:17:48)

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 know, you've been really active hiring, you know, recently hired the AG team, I guess. First wanted to just get an update on as you think about growth. Where are you seeing the growth opportunities 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 hire or lift out a team. Just kind of curious what you're seeing on that front.

James Beckwith - President and CEO - (00:18:29)

Yeah, 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. 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 are beginning to know that we're serious and we're excited about, you know, where we stand in that. And the sales cycle in that business can be long. Sometimes, you know, over two or three years, two or three seasons. So we're, we're very committed to it. Number one, we continue to see growth in our MHC and RV business and we continue to add core clients in the space. 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. You know, RV MHC storage is really a national platform and we're doing business across the United States. In fact, Heather, we file what tax returns in 27 different states?

Heather Luck - Executive Vice President and Chief Financial Officer - (00:19:57)

We do.

James Beckwith - President and CEO - (00:19:59)

So we have Nexus in all these states. So it's truly geographically diversified. So, David, we expect to see continued growth in that particular segment from a geographic perspective. You know, our Bay Area loan pipeline remains very strong and that's, you know, made up of CNI 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. So that's strong. Our Construction Industries group continues to perform well and that's primarily a deposit play. 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 nonprofit.