Executive Summary / Key Takeaways

• Robust Organic Growth: Five Star Bancorp (FSBC) continues to demonstrate exceptional organic growth, driven by a highly effective, talent-centric business development strategy and strategic geographic expansion across Northern California, including the San Francisco Bay Area.
• Strong Financial Performance & Efficiency: The company delivered impressive Q2 2025 results, marked by significant net income growth, expanding net interest margin, and an improving efficiency ratio, reflecting strong operating leverage and disciplined expense management.
• Differentiated Business Model: FSBC's relationship-based, customer-centric approach, coupled with conservative underwriting and a focus on niche commercial real estate and emerging agribusiness verticals, underpins its stable asset quality and resilient funding base.
• Solid Outlook & Shareholder Value: Management projects continued strong loan and deposit growth of 10-12% for 2025, anticipating further margin expansion and sustained shareholder returns through its consistent dividend policy, supported by ample liquidity and robust capital.
• Technological Enablement: While not a technology company in the traditional sense, FSBC leverages modern digital banking and loan origination platforms to enhance customer experience, improve operational efficiency, and support its high-touch service model, contributing to its competitive edge.

The California Catalyst: Five Star's Differentiated Approach

Five Star Bancorp, headquartered in California's greater Sacramento metropolitan area, is more than just a regional bank; it is a purpose-driven financial partner deeply embedded in the economic fabric of Northern California. Since its inception in 1999, and through its IPO in 2021, FSBC has meticulously cultivated a reputation as the go-to business bank for small and medium-sized enterprises, professionals, and individuals. Its mission is clear: to be the top business bank in its markets through exceptional service, deep connectivity, and customer empathy, with a dedicated focus on real estate, agricultural, and faith-based sectors.

In a competitive landscape dominated by national giants like Wells Fargo (WFC) and Bank of America (BAC), and regional players such as Columbia Banking System (COLB) and Pacific Western Bancorp (PACW), FSBC carves out its niche through a distinct relationship-first strategy. While larger banks leverage vast scale and extensive technological infrastructure, FSBC differentiates itself with localized expertise, personalized service, and a highly motivated team of business development officers (BDOs). This approach fosters stronger customer loyalty and more efficient local decision-making, often outcompeting rivals in targeted segments where personal relationships outweigh sheer size. For instance, FSBC's net profit margin of 22.23% (TTM) stands favorably against WFC's 16% and BAC's 14% (2024 annual), suggesting effective operational management within its chosen niche.

FSBC's technological differentiators are not about proprietary hardware but rather about enabling its core relationship-based model. The company strategically invests in digital banking platforms and loan origination and documentation systems. These technologies enhance the "speed to serve" and "certainty of execution" that management emphasizes, streamlining processes for both customers and internal teams. The benefits are tangible: increased usage of its digital banking platform, higher transaction volumes driven by a growing number of loan and deposit accounts, and an expanded user base on its loan origination system. These operational efficiencies contribute directly to FSBC's competitive moat, allowing it to deliver a high-touch service model efficiently and cost-effectively, without requiring significant new technology investments beyond current headcount additions.

Strategic Expansion and Organic Growth Engine

FSBC's growth narrative is one of deliberate expansion and talent acquisition. The company has aggressively expanded its physical footprint and human capital, particularly in the dynamic San Francisco Bay Area. Following the successful opening of a full-service office in San Francisco's Financial District in September 2024, FSBC is set to open a Walnut Creek office in September 2025, with future plans eyeing the South Bay. This expansion is fueled by a "feet on the street" strategy, with 40 BDOs as of Q2 2025, a significant increase from previous periods. This "cadre of professionals" is a key competitive advantage, driving new relationships and market penetration in a region still undergoing "turmoil and repairing" from recent bank failures, creating opportunities for FSBC to attract both clients and high-quality talent from larger institutions.

Beyond geographic reach, FSBC is strategically diversifying its loan portfolio. While commercial real estate (CRE) remains its primary focus, constituting 84.57% of loans held for investment at June 30, 2025, the company maintains conservative underwriting standards, evidenced by a 50.03% loan-to-value (LTV) on CRE in Q1 2025. Growth in Q2 2025 was largely driven by the CRE portfolio, which expanded by $125.4 million, with particular strength in mobile home parks, RV parks, storage, multifamily, and student housing. Notably, FSBC is also cautiously financing office buildings in downtown San Francisco, leveraging the "massive reset" in property values to apply conservative 50-60% LTVs on new equity, deeming these loans "incredibly safe."

A significant strategic initiative is the expansion into the food and agribusiness vertical, announced in Q2 2025. Led by a seasoned team, this new vertical targets C&I middle-market credits—large processors of agricultural commodities on the West Coast, with revenues ranging from $50 million to $0.5 billion. Management views this market as "underserved by the majors," presenting a substantial growth opportunity that will also help "balance out our loan portfolio" and potentially reduce long-term CRE concentrations. Furthermore, FSBC maintains a consumer loan book, primarily purchased from Bankers Health Group (BHG), capped at an average outstanding balance of $300 million. These loans, with a weighted average yield of approximately 8.11% on recent purchases, amortize quickly, requiring continuous replenishment.

Financial Performance: A Story of Resilient Growth and Efficiency

Five Star Bancorp's financial performance in Q2 2025 underscores its effective strategy and operational discipline. The company reported net income of $14.5 million for the three months ended June 30, 2025, a substantial increase from $10.8 million in the corresponding period of 2024. Diluted earnings per share rose to $0.68 from $0.51 year-over-year. Return on average assets (ROAA) stood at 1.37%, and return on average equity (ROAE) was 14.17%, both indicating strong profitability.

Net interest income, the primary driver of FSBC's profitability, increased by $7.4 million (25.52%) to $36.5 million in Q2 2025 compared to Q2 2024. The net interest margin (NIM) expanded by 14 basis points to 3.53%. This improvement was largely attributable to a $493.7 million (15.44%) increase in average loan balances and a 26 basis point improvement in the average yield on loans, reaching 6.09%. While interest expense increased due to a $686.1 million (22.50%) rise in average deposit balances, the company's strategic management of funding costs, including short-term wholesale deposits, helped mitigate this impact.

Deposit growth remains robust, with total deposits increasing by $336.6 million (9.46%) to $3.9 billion at June 30, 2025, from December 31, 2024. Crucially, non-wholesale deposits grew by $240 million, and non-interest-bearing deposits increased by $81.4 million to $1.0 billion, representing a healthy 25.78% of total deposits. This strong core deposit growth, coupled with a disciplined approach to wholesale funding, improved the loan-to-deposit ratio to 96.50% from 99.38% at year-end 2024. Total assets grew by $360.2 million (8.89%) to $4.4 billion, primarily driven by a $225.3 million (6.38%) increase in loans held for investment.

Asset quality remains a hallmark of FSBC's conservative underwriting. Non-accrual loans represented a mere 0.06% of total loans held for investment at June 30, 2025, with the allowance for credit losses (ACL) to total loans held for investment at 1.07%. The provision for credit losses increased to $2.5 million in Q2 2025, mainly due to loan growth and net charge-offs. The company's ACL methodology incorporates refined models for specific loan types, such as segregating Manufactured Home Community (MHC) and RV Park loans, and adjusting for increased charge-offs in the CI SBA pool, reflecting a proactive approach to risk management.

Operational efficiency is a key focus, with the efficiency ratio improving to 41.03% in Q2 2025 from 44.07% in Q2 2024. This improvement is attributed to increased net interest income and operating leverage. While non-interest expenses, particularly salaries and employee benefits, increased due to a 16.58% rise in headcount and higher digital banking and loan system usage, management emphasizes that past investments in infrastructure and technology are yielding benefits, with no significant new technology investments anticipated. All capital ratios remain well above regulatory thresholds, with the total risk-based capital ratio at 13.73% at June 30, 2025, demonstrating a strong capital foundation for continued growth.

Outlook and Strategic Imperatives

Five Star Bancorp's outlook for the remainder of 2025 is bullish, with management projecting 10-12% loan and deposit growth. This confidence is rooted in a robust loan pipeline, the continued success of its BDO-driven sales force, and strategic market opportunities. The net interest margin is expected to see slight expansion, with new loan production coming on at higher yields (e.g., 7.03% weighted average in Q2 2025) and the repricing of existing CRE loans contributing to yield improvement. The company's strategy of keeping wholesale deposits on short, 3-month repricing intervals is designed to capture potential declines in funding costs if the Federal Reserve cuts rates, further benefiting the NIM.

Expense growth is anticipated to be managed, with an estimated increase of $0.5 million to $0.75 million in Q3 2025 due to the Walnut Creek office opening. However, the efficiency ratio is expected to continue improving, potentially falling below 40%, as the company leverages its existing scalable technology and back-office support. The effective tax rate is forecast at approximately 26.65% for modeling purposes. FSBC maintains a strong liquidity position, with approximately $2.2 billion in total liquidity, including unused FHLB and Federal Reserve Discount Window capacities, and aims to maintain a "fortress balance sheet" with 10% cash and a loan-to-deposit ratio below 100%. The company also expects to continue its quarterly cash dividend of $0.20 per share, reflecting its commitment to shareholder returns.

Risks and Mitigation

Despite its strong performance and optimistic outlook, FSBC faces inherent risks. A significant concentration in commercial real estate loans (84.57% of the portfolio) and geographic concentration in California exposes the company to regional economic downturns and real estate market fluctuations. However, FSBC mitigates this through strong underwriting, internal concentration limits by sector, annual property evaluations, and semi-annual stress testing.

Interest rate sensitivity remains a key market risk, as changes in rates can impact net interest income. FSBC actively manages this through its Asset Liability Committee, monitoring asset and liability repricing dynamics. The company also manages liquidity risk associated with large deposit relationships, where 105 accounts exceeding $5 million each constitute nearly 60% of total deposits, by maintaining ample liquidity and correspondent bank lines. The SBA loan book, while a small portion, is acknowledged as "tough" due to high borrowing costs and global supply chain sensitivities, but is heavily reserved against (almost 9%). While tariffs could impact the bank, management believes its CRE-focused portfolio positions it relatively better than other institutions.

Conclusion

Five Star Bancorp's compelling investment thesis is built on its unwavering commitment to a relationship-first banking model, strategically executed through disciplined organic growth and targeted expansion. The company's ability to consistently attract new clients and talent, particularly in the competitive San Francisco Bay Area, underscores the effectiveness of its "feet on the street" approach. Supported by efficient operational technology and conservative underwriting, FSBC has demonstrated robust financial performance, marked by strong loan and deposit growth, expanding margins, and improving efficiency.

As FSBC continues to diversify its loan portfolio with new verticals like food and agribusiness, and maintains a strong capital and liquidity position, it is well-positioned to capitalize on market opportunities. While concentration risks and interest rate sensitivities are present, the company's proactive risk management and clear strategic roadmap provide a solid foundation. For discerning investors, FSBC represents a regional banking powerhouse that is not merely growing, but thoughtfully cultivating its market presence and delivering consistent value through a deeply embedded, customer-centric strategy.