Five Star Bancorp Earnings Call Highlights Profitable Growth

Five Star Bancorp ((FSBC)) has held its Q4 earnings call. Read on for the main highlights of the call.

Five Star Bancorp Charts Confident Growth Path Despite Cost and Capital Pressures

Five Star Bancorp’s latest earnings call carried an overall upbeat tone, with management highlighting a year of robust growth in loans and deposits, expanding net interest margin, and strong profitability—all while maintaining pristine credit quality. Executives underscored that 2025’s performance validates their growth strategy, including targeted hiring and branch expansion, even as they acknowledged rising operating expenses, modest pressure on fee income, and some compression in capital ratios as key trade-offs. Management repeatedly emphasized confidence that these challenges are manageable within a disciplined, roughly 10% growth trajectory.

Strong Annual Growth Across Key Metrics

Five Star Bancorp delivered a standout year across core financial metrics. Loans held for investment surged 15%, or $542.2 million, while total deposits climbed 18%, adding $643.1 million to the funding base. This balance sheet growth translated into a 35% jump in net income to $61.6 million and a 28% rise in earnings per share to $2.90. These results signal that the bank is converting its growth strategy into tangible shareholder value, with top-line expansion flowing through to the bottom line.

Solid Fourth-Quarter Financial Performance

The fourth quarter capped the year with strong profitability and operating efficiency. Net income for Q4 came in at $17.6 million, or $0.83 per share. Returns remained compelling, with return on average assets at 1.50% and return on average equity at 15.97%, levels that compare favorably with many peers. The efficiency ratio for the quarter was 40.62%, indicating tight cost control even amid elevated investment in talent and infrastructure. Overall, Q4 performance reinforced the full-year momentum.

Net Interest Margin and Net Interest Income Expansion

A key highlight of the call was the continued expansion in net interest income (NII) and net interest margin (NIM). NIM improved by 10 basis points quarter over quarter to 3.66%, and for the full year averaged 3.55%, up 23 basis points from the prior year. Net interest income grew 7% sequentially in Q4 (+$2.7 million) and an impressive 27% year over year (+$32.2 million), primarily driven by higher loan interest income and robust new loan production. This margin and NII expansion is particularly notable given a competitive lending landscape and rising funding costs across the industry.

Improved Deposit Costs and Funding Mix

Management highlighted meaningful progress on the funding side. The average cost of total deposits fell 16 basis points year over year to 2.40% and dropped 21 basis points in Q4 alone to 2.23%. The bank reduced wholesale deposits by $95 million during 2025, a 17% decline, while growing non‑wholesale deposits by $738.1 million, or 25%. Noninterest-bearing deposits now account for 26% of total deposits, supporting margin resilience. This shift toward core, lower-cost funding is a positive signal for investors watching deposit stability and profitability.

Strong Balance Sheet Growth and CRE Production

Five Star’s balance sheet continued to scale, ending the year as a $4.8 billion institution after total assets grew by $701.6 million. Loans held for investment increased by $542.2 million, up 15% year over year. Commercial real estate (CRE) lending was the main engine of growth, adding $161.4 million in Q4 and $448.5 million over the year. The bank is clearly leaning into CRE as a core competency and growth driver, while investors will watch closely how this portfolio performs through future rate cycles and property market conditions.

Maintained Asset Quality and Provisioning

Despite rapid loan growth, asset quality remained a standout strength. Nonperforming loans were held at a very low 8 basis points of total loans, underscoring conservative underwriting and diligent portfolio management. The full-year provision for credit losses was $9.7 million, with $2.8 million booked in Q4, largely reflecting growth rather than emerging credit stress. Management stressed that credit monitoring remains stringent, helping support the bank’s ability to grow without sacrificing quality.

Operational Expansion and Talent Additions

The bank continued to invest in its franchise, opening a new office in Walnut Creek and expanding its agribusiness vertical. Management cited the addition of roughly 10–12 seasoned business development officers during 2025, aimed at driving organic loan growth and deepening deposit relationships. These hires are intended to build out long-term revenue capacity, particularly in key commercial segments, though they also contributed to higher operating expenses in the near term.

Shareholder Return – Dividend Increase

In a move that signals confidence in the sustainability of earnings and capital, Five Star announced a quarterly cash dividend increase of $0.05 to $0.25 per share, the first increase since April 2023. The higher payout underscores management’s view that strong profitability and disciplined capital management can support both growth initiatives and direct returns to shareholders.

Quarterly Noninterest Income Decline

One softer spot in the quarter was noninterest income, which slipped to $1.4 million in Q4 from $2.0 million in the prior period. The decline was primarily tied to weaker earnings from equity investments and venture-backed funds. For the full year, noninterest income was essentially flat, rising only $0.1 million. While fee and other non-spread income are not the primary earnings driver for Five Star, this line item remains more volatile and less of a growth lever than the core lending and deposit franchise.

Rising Noninterest Expenses from Hiring

Noninterest expenses moved higher as the bank invested in people and capabilities to support growth. Costs increased $1.1 million quarter over quarter and $10.5 million year over year, driven by higher headcount and increased salaries and benefits. Management indicated that operating expenses should rise by about $300,000 in Q1 and framed a 2026 target range of 1.48%–1.55% of average assets for noninterest expense. While these investments weigh on near-term efficiency, they are intended to underpin the bank’s medium-term growth ambitions.

Capital Ratios Compressed by Rapid Growth

Rapid balance sheet expansion has pressured capital ratios, including a common equity Tier 1 (CET1) ratio now around 10.5%–10.6%. Management noted that this level is sufficient to support a more moderate ~10% annual growth rate without raising capital. However, they cautioned that sustaining a faster 15%–20% growth pace would likely require an external capital infusion in the 2027–2028 timeframe. The message to investors: growth remains attractive but must be balanced carefully against capital strength and regulatory expectations.

Competitive Pressure on Loan Spreads and Upcoming Resets

The lending environment remains highly competitive, with management citing instances of loan spreads compressed to roughly 200 basis points over reference rates. This could limit further NIM expansion and puts a premium on disciplined pricing and relationship depth. Looking ahead to 2026, a large cohort of five-year loans originated in 2021 is scheduled to reset. Management expects some borrowers may refinance into agency channels, leading to potential balance outflows and some attrition, though they view this as manageable within their growth plan.

Small Increase in Nonperforming Loans in Q4

While overall credit quality is strong, there was a modest deterioration in Q4. Nonperforming loans increased by $1.0 million due to two faith-based real estate loans moving to nonperforming status. Even with this uptick, NPLs remain at just 8 basis points of total loans, emphasizing that issues are idiosyncratic rather than systemic. Management did not signal broader concerns, but investors will watch this segment as rates remain elevated.

Concentration and Remaining Broker Deposits

The bank’s deposit base, while stable and long-tenured, carries some concentration risk. Approximately 61% of deposit relationships exceed $5 million, though management noted an average relationship tenure of around eight years as a mitigating factor. Broker and wholesale deposits stood at $175 million at year-end, and management reiterated their intention to continue reducing this balance over time. The strategic focus remains on building core, granular deposits to support growth and enhance funding resilience.

Guidance and Forward-Looking Outlook

Looking ahead, management guided to roughly 10% growth in both loans and deposits for 2026, a pace they believe can be self-funded while maintaining current CET1 levels around 10.5%–10.6%. The current staffing is expected to be sufficient to support this plan, with only modest incremental operating expenses—about $300,000 in Q1—and a full-year 2026 noninterest-expense ratio targeted between 1.48% and 1.55% of average assets. They reiterated a healthy loan pipeline but cautioned that payoffs and the 2026 wave of five-year loan resets could affect loan retention. The bank also continues to work down its $175 million in broker/wholesale deposits and reaffirmed its increased quarterly dividend, reflecting confidence in the durability of earnings.

In sum, Five Star Bancorp’s earnings call painted a picture of a high-growth, high-return bank carefully managing the trade-offs between expansion, capital, and risk. Strong loan and deposit growth, widening margins, and very low credit losses underpin a constructive outlook, even as the bank navigates higher expenses, competitive loan pricing, and capital ratio pressure. For investors, the story is one of disciplined growth: management is signaling that while it sees ample opportunity, it intends to pursue it at a pace that preserves balance sheet strength and supports continued shareholder returns.