Five Star Bancorp Q1 2026 Earnings Call - Aggressive Deposit Shift and Southern California Expansion

Operator: 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 report on Form 10-K for the year ended December 31st, 2025, and in particular, the information set forth in Item 1A, Risk Factors. 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 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 and 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 Bancorp President and CEO. Please go ahead.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Thank you for joining us to review Five Star Bancorp’s financial results for Q1 2026. These results were released yesterday and are available on our website, fivestarbank.com, under the Investor Relations section. Joining me today is Heather Luck, Executive Vice President and Chief Financial Officer. Q1 2026 marked another period of outstanding achievement for Five Star Bancorp, underscored by robust growth across all markets we serve and consistent strong performance. During the quarter, we continued to deepen our client relationships and expanded our presence in key geographies while investing in both talent and technology to support ongoing organic growth. Our commitment to disciplined execution and differentiated customer service was evident in our solid results. Q1 2026 earnings per share increased to $0.87 per share, up $0.04 per share from the prior quarter.

With annualized growth in loans held for investment of 14% and annualized deposit growth of 26%, we remain well-positioned to capitalize on new opportunities and drive sustainable value for our shareholders, customers, and communities. Financial highlights during Q1 2026 include net income of $18.6 million, up 6% from the prior quarter, return on average assets of 1.55% and an increase of 5 basis points from the prior quarter, return on average equity of 16.73%, an increase of 76 basis points from the prior quarter, net interest margin of 3.70%, an increase of 4 basis points from the prior quarter, and average cost of total deposits of 2.13%, a decrease of 10 basis points from the prior quarter. Our Q1 results were driven by robust loan and deposit growth.

Loans held for investment grew by $138.5 million or 14% on an annualized basis. Total deposits grew by $268.3 million or 26% on an annualized basis, with non-wholesale deposits up $350.2 million, offsetting an $81.9 million reduction in wholesale deposits. This shift reflects our focus on building stable, relationship-based core deposit funding. Our asset quality remains strong, with non-performing loans representing just seven basis points of total loans held for investment, a reflection of our conservative underwriting. We continue to be well capitalized, with all capital ratios well above regulatory thresholds for the quarter. We remain committed to delivering value to our shareholders.

In Q1, we paid a cash dividend of $0.25 per share and declared an additional $0.25 dividend expected to be paid in May of 2026. Our total assets increased by $276.9 million during the quarter, largely driven by loan growth within the commercial real estate portfolio, which increased by $116.2 million. Competition has increased, but our loan pipeline remains strong. Ongoing uncertainty surrounding energy supply chains and global economic consequences of the Iran conflict has triggered volatility in interest rates. We believe we are well-positioned for changes in interest rates as approximately 75% of our loans held for investment are adjustable or floating. This gives us flexibility to respond to market shifts and helps protect our earnings in a volatile environment.

Our prudent underwriting standards, comprehensive loan monitoring, and focus on relationship-driven lending have contributed to maintaining strong credit quality. As a result, we have a very low volume of non-performing loans, which declined by $280,000 during the quarter. We recorded a $2.7 million provision for credit losses during the quarter, primarily related to loan growth. The increase in total liabilities during the quarter was the result of growth in interest-bearing and non-interest-bearing deposits related to both new accounts and inflows from existing customers. Non-wholesale deposits increased by $350.2 million, while wholesale deposits decreased by $81.9 million. Non-interest-bearing deposits accounted for approximately 28% of total deposits and an increase from approximately 26% as of December 31, 2025. Approximately 61% of our total deposit relationships total more than $5 million.

These deposits have a long tenure with the bank, with an average age of approximately eight years. We believe our deposit portfolio to be a stable funding base for our future growth. On that note, I will hand it over to Heather to present the results of operations. Heather?

Heather Luck, Executive Vice President and Chief Financial Officer, Five Star Bancorp: Thank you, James, and hello, everyone. Net interest income increased to $43.5 million, a 3% increase from Q4 2025, supported by both volume and margin expansion. Our net interest margin improved to 3.70% from 3.66% in the prior quarter, reflecting disciplined pricing and favorable mix of assets and liabilities. Interest income increased by $926,000 from the previous quarter, mainly due to a 4% increase in the average balance of loans. The increase in interest income was augmented by a $166,000 decrease in interest expense due to a 10 basis point decline in the average cost of deposits.

While the average balance of deposits increased by 5% during the quarter, a 5% increase in the average balance of non-interest-bearing deposits, combined with a decrease in the cost associated with deposits, resulted in a net decrease in total interest expense. Non-interest income increased to $1.6 million in the first quarter from $1.4 million in the previous quarter, primarily due to an increase in fees from swap referrals and a special FHLB stock dividend recognized during the three months ended March 31, 2026, partially offset by an overall decline in earnings related to investments in venture-backed funds. Non-interest expense decreased by $263,000 in the three months ended March 31, 2026. This is primarily due to the release of a $1 million loss contingency on an SBA loan that did not occur during the prior quarter.

This was partially offset by an increase in salaries and employee benefits related to increased headcount to support customer-facing and back-office operations. Our efficiency ratio improved to 38.57% from 40.62% in the prior quarter, primarily driven by the release of the loss contingency. The provision for income taxes for the quarter ended March 31, 2026, increased by $1 million as compared to the prior year, primarily due to an increase in taxable income recognized and a net reduction in transferable tax credits recognized during the quarter of approximately $664,000. Now I will hand it back to James for closing remarks.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Thank you, Heather. 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 prudent approach to portfolio management will benefit our customers, employees, community, and shareholders. As we look to Q2, we remain committed to our disciplined approach to growth, prudent risk management, and delivering value to all of our stakeholders. We’re excited about the opportunities our markets and confident of our ability to continually executing on our strategic priorities. Our focus will remain on expanding our presence in key geographies, deepening client relationships, and investing in technology and talent to support our long-term success. We appreciate your time today. This concludes today’s presentation. Now we will be happy to take any questions you might have.

Operator: We will now begin the question and answer session. The first question today is from David Feaster with Raymond James. Please go ahead.

David Feaster, Analyst, Raymond James: Hey, this is David Feaster on for David Feaster. Good morning, everybody.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Good morning, David Feaster. How are you?

David Feaster, Analyst, Raymond James: I am doing well. I just wanted to start on the SoCal expansion, announced earlier. I know it’s early innings, on a high level, I’m just curious what you’re most excited about for that market and how the team down there has been ramping up so far. I also wanted to just gauge your thoughts on potential de novo expansion in Southern California alongside those hires and how you see that market evolving broadly.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Well, thank you for the question. We’re very excited about the team that we brought on. We have 4 business development officers and 2 support staff. They’re very competent. So far, deal flow seems to be very strong from them. It’s a lot of fun for us engaging with them in a market which is just substantial. Much bigger market than Northern California, as you know. The deal flow that we’re seeing right now are just great credits, C&I-based. We’re excited about the opportunities that the team is presenting us.

In terms of, you know, de novo operations or potentials, you know, we have a team in Newport Beach right now, and then we have a team up in, you know, in, you know, L.A. County, Ventura County. As they continue to mature and develop, the next step for us would be to open a full service office in those localities. We want to see a substantial growth coming from those teams, and it will help us get to where we want to be ultimately, which is to have full service offices.

David Feaster, Analyst, Raymond James: That’s really helpful. I’m excited to see how that develops. Maybe sticking on the growth side, origination’s really strong during the quarter. I’m just curious where that’s coming from broadly. Is it more a function of increasing demand in your markets or increasing contribution from existing bankers or new hires? Maybe just curious where you’re seeing the most opportunity for growth within specific segments as well.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Well, it’s coming from a lot of different places. You know, our existing business development people, we now have 46 of them working for the company. But during the quarter, it was 42. Everybody is producing. Everybody’s doing quite well and across our verticals that we have and also our geographies. We’re seeing substantial growth coming from all the way up into Redding, all the way down to Walnut Creek in the Bay Area. Our ag team also is doing quite well. We’re hitting on a lot of cylinders right now in terms of deal flow and really good relationships that our seasoned professionals are bringing in.

I couldn’t really single out one, but maybe on the depository side, our government book has done quite well on some relationships, growth in relationships. We’re excited about that. Our manufactured home and RV folks are doing well also. It’s coming from a lot of different sources, which we’re all very, very excited about.

David Feaster, Analyst, Raymond James: That’s great to hear. Then maybe, on the deposit side, it’s good to see the growth during the quarter, which allowed you to pay down some wholesale funding. I’m just curious, you know, what was primarily driving that, if you see any opportunities for additional funding cost leverage from here, especially given the prospect of no Fed cuts this year.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Right. We’re going to continue to focus on reducing our wholesale deposit book, with a desire to be out of it by 12/31. Hopefully, we’ll be able to do that more quickly. That’s our plan. That will provide maybe some relief in, you know, our interest cost. It’s really, it’s really going to be dependent upon continuing to push deposits. I mean, the value of our franchise, we recognize, is in our deposit base. We’re executing quite well on that in terms of bringing on new relationships. Non-interest-bearing deposits saw substantial growth in Q1. We hope and expect to, you know, to see that growth continue. As I mentioned previously, our government banking team has done quite well.

That team really covers the entire state, and their focus is on cities and counties. Moreover, their focus is really on special districts, and they’ve done quite well in that space and their pipelines remain very strong. We’re excited about that.

David Feaster, Analyst, Raymond James: That’s great. Thanks, guys. Great quarter.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Thank you.

Operator: The next question is from Woody Ley with KBW. Please go ahead.

Woody Ley, Analyst, KBW: Hey, thanks for taking my questions. I had a follow-up on deposits. You know, the focus is continuing to pay down wholesale deposits. If I look over the past year, I mean, it’s pretty incredible, the mix change that’s undergone there. It’s just curious, is that being driven by some of these subverticals, that’s allowed you to grow core deposits? Is it, is it new customers to the bank? Is it, is it expanding the wallet of current customers? Just would kinda love your take on that.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: It’s a great mix between, you know, deposit flow from existing customers, but also new relationships that we’ve brought on. You know, often a deposit relationship or any banking relationship takes a while to mature. We’re seeing some growth coming from the business that we put on in 2025 as those relationships kind of work their way over to us, Woody. That’s exciting. Also, you know, our first 3 months have been very strong in terms of new deposit growth, in terms of the new accounts. We’re excited about that. Again, it’s really, you know, our government book has done quite well, but it’s really our growth in deposits is coming from, you know, from all different types of verticals.

You know, what we’re trying to do is pay down our wholesale book. I mean, it’s pretty evident what we’ve been able to do for the last six months with that. Hopefully we’ll be out of broker deposits, as I mentioned, by 12/31. We certainly like to do that more quickly than by the end of the year, and we’ll see how the second quarter goes.

Woody Ley, Analyst, KBW: Yeah. I appreciate the color there. I would imagine, paying down the broker has been a positive to the net interest margin, we saw the NIM take another step up in the first quarter. How are y’all thinking about continued NIM expansion from here? You know, especially if assume cuts are flat and then kind of the incremental impact that that rate cuts could provide.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Yeah. We don’t know how much juice is left in our in terms of the impact of rates or have on our NIM. You know, we’re kind of thinking it’s settling around, in around 3.70, which is what it was for the quarter. We do expect increase in net interest income to come from growth. That’s kinda what our sense of it is right now. NIM, you know, it might move up a couple basis points, but nothing substantial like we’ve seen for the last, you know, 4 quarters. We’re settling in on this NIM range of 3.70-3.75. Hopefully, we can maintain it there and just have net interest income being driven by growth.

Woody Ley, Analyst, KBW: Yeah. I appreciate the color. Maybe just last for me on the growth. You know, loan growth remains really strong. It feels like, I have heard just some anecdotal commentary across the industry of some increased competition, especially among the bigger banks. Are you seeing that within your footprint?

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: You know, we’ve been doing this for quite some time, competition is always present. We’ve mentioned it in the script that competition is out there. Yeah, on good deals, people are fighting for them. You gotta be careful that you know, your growth is spread out amongst several relationships and your pricing is something that you can make money on. We know it’s gonna be competitive for the best deals. That’s our mindset when we, you know, when we come to work every day. We’re winning our fair share. We’re not winning everything, okay? If we were winning everything, maybe we’re not pricing it right. We are winning our fair share.

The function of our growth, what’s really driving our growth is just the number of people we have, the boots on the ground, so to speak, Woody. Relative to our size, you know, and total headcount, we just have more people, more biz dev people. The opportunities that are coming to us, are really being driven by more than anything else, just by the number of folks we have in the space.

Woody Ley, Analyst, KBW: Yeah. That all sounds good. Thanks for taking my questions.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: You bet.

Operator: The next question is from Andrew Terrell with Stephens. Please go ahead.

Andrew Terrell, Analyst, Stephens: Hey, good morning.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Hey, good morning, Andrew.

Andrew Terrell, Analyst, Stephens: Wanted to stick on maybe margin and deposits for a bit. Do you have how much of the deposit growth this quarter was related to the government or the special district, kinda business line? I would love to get a sense for, you know, where you’re bringing on cost-wise the incremental dollar of core deposits versus, you know, what’s rolling off that we can see on kinda the wholesale side pricing-wise.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Sure. The growth in our government book in the first quarter was quite substantial, as I mentioned. It’s about $190 million. It was really, really kind of drove, you know, what were, you know, the overall increases in deposits. Other verticals did also quite well, but that one kind of stands out. That, that money that came in is really kind of priced right on top of our broker deposit book. There’s no really incremental pickup, if you will, Andrew, in terms of cost reduction, if you will, with that money coming in versus having the broker deposits go away. You know, for some of these counties, that’s their liquidity.

We hope to, you know, bring on some non-interest-bearing deposits through that process through those relationships. We have.

Heather Luck, Executive Vice President and Chief Financial Officer, Five Star Bancorp: Mm-hmm.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: A lot of that growth is really coming right at the margin.

Heather Luck, Executive Vice President and Chief Financial Officer, Five Star Bancorp: Just for reference, just to compare the two. You know, our brokered book at the end of the quarter was sitting at about 3.82% for the actual broker deposits, and then the late rate is about the 3.80% range.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Right.

Heather Luck, Executive Vice President and Chief Financial Officer, Five Star Bancorp: We’re pretty much just swapping dollar for dollar.

Andrew Terrell, Analyst, Stephens: Yep, yep. Okay. Makes sense. On the non-interest-bearing deposits, obviously, you know, fantastic growth this quarter. Was there anything in the, in the end of period figure for non-interest bearing that we can see? I think it was 1.23. Anything that was, you know, elevated, specifically kind of a period that’s norm-normalized in the second quarter so far? Is that kind of a good base to work off of?

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Sure.

Andrew Terrell, Analyst, Stephens: Just asking because it’s a lot higher than the average.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: A couple things really kind of drove non-interest-bearing deposits. One, we do have a title company that’s doing quite well, a pretty big relationship. Also, with some of our folks in our Newport Beach office, they’re bringing on their customer base, which is escrow companies, and all those monies are non-interest-bearing. We expect to continue to see growth in our Newport Beach office from those 2 folks that we’ve brought on. I think in combination of that and then also all the other C&I business that we’ve been doing, you know, up and down the platform that really kind of drove non-interest-bearing deposits. I think those 2 matters kind of stand out.

Andrew Terrell, Analyst, Stephens: Yep. Yep. Okay. I’ve got to ask, you know, I think last quarter we talked about kind of 10% growth for the year on both sides of the balance sheet. You’re, you’re pretty darn close on the deposit side already. You know, any updated expectations on pace of balance sheet growth or targets for the year?

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Yeah, I think, you know, we, you know, we guided pretty consistent with what our plan is. But obviously we exceeded that, which is a good thing. We could probably see maybe 10%-12% growth on both sides of the balance sheet, Andrew, for the remainder of the year. We’ll just have to see how it goes. We’re excited. Our pipelines are pretty robust right now, frankly. With the bringing on of this new team in Southern California, we expect to really kind of drive growth on both sides, both deposits and loans. Their book and their client base and prospect base is really very strong C&I operating companies, which will bring in some nice non-interest-bearing deposits.

I think that’s kind of where we are right now on that, 10%-12% growth, Andrew.

Andrew Terrell, Analyst, Stephens: Yep. Okay. If I could just ask one last one. If I kind of normalize the expense base, it looks like, you know, $18.4 million or so for the quarter. Just update thoughts on kind of expense run rate going forward.

Heather Luck, Executive Vice President and Chief Financial Officer, Five Star Bancorp: Yeah. I think, you know, you could probably add to the normalized, like add back $1 million to adjust for that release of the accrual. If you add about half a million to that, we’re still consistently kind of falling in that 148-155 range. I think we’ll stick to that probably for the next quarter or two.

Andrew Terrell, Analyst, Stephens: Great. Thanks so much.

Operator: The next question is from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner, Analyst, D.A. Davidson: Thanks. Good morning.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Morning, Gary.

Gary Tenner, Analyst, D.A. Davidson: James, to your comments. Good morning. To your comments just a moment ago on the Newport office and bringing escrow company deposits. Does any of that start leaning into deposits that start showing up on the expense line from any kind of earnings credit noise or anything like that? Or are these pure non-interest-bearing deposits?

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: No. I mean, you’ve got to earnings credits are pretty robust in that space, and we’re not doing anything in terms of earnings credit rate for those new customers, anything outside of what the market rates are. There, there will be some, you know, some expense associated with that, based upon those earnings credits. We fully expect that and have planned for it. It has a cost, to your point, Gary.

Gary Tenner, Analyst, D.A. Davidson: Yeah. All right, yeah. Thanks for that. Also a follow-up, I guess, on the expenses in general. I mean, you’ve been, you know, year-over-year expenses up about 20% first quarter to first quarter, adjusted for that million-dollar SBA liability. Obviously, you’re built for growth. Is the pace of investment changing at all on the next 12 months versus the last 12 months in terms of hires, et cetera? You know, thinking about it from a different angle than maybe the last question.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: It’s, you know, we’re investing in the business. You know, we announced this month that we are bringing on, I guess the announcement was five people, but we’re actually bringing on six. That’s a substantial cost. These folks aren’t cheap. We’ll continue to invest back in the business because, you know, and take the Bay Area for Gary, you know, we’re desirous of being in the South Bay, you know, from Palo Alto all the way down to San Jose. We’re obviously looking at opportunities there. We’re gonna continue to invest. Your question is the pace going to be consistent with what it’s been in the past? The answer, I think, is yes.

Heather Luck, Executive Vice President and Chief Financial Officer, Five Star Bancorp: Yeah. I think we’re following, you know, what really worked well in the Bay is hiring smaller teams of people and smaller tranches of people. You know, we’re starting to do that in Southern California as well. That’s worked really well for us too, to integrate them into the company. You know, I kinda think you’re gonna just have some stair-stepping, and we’ll have some resets each quarter on what our new expectation for expenses are. That likely will happen over the next year or two.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Yeah.

Heather Luck, Executive Vice President and Chief Financial Officer, Five Star Bancorp: Mm-hmm.

Gary Tenner, Analyst, D.A. Davidson: Yeah. I mean, you’ve clearly developed a playbook that works for moving to new markets, so appreciate the thoughts on that.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Thank you.

Operator: Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

James Beckwith, President and Chief Executive Officer, Five Star Bancorp: Thank you. I want to reiterate our appreciation for the trust and support of our shareholders, clients, and employees. The results we share today are a direct reflection of the dedication and hard work of our entire Five Star Bank team, as well as the enduring relationships we have built with our customers and communities. It’s our privilege to continue to be a driving force of economic development, a trusted resource for our clients, and a committed advocate for our communities. We look forward to speaking with you again in July to discuss earnings for Q2. 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.