Five Star Bancorp

Welcome to the Five Star Bancorp First 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 meeting 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 two 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.

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, 5starbank.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 5 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 87 cents 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 five basis points from the prior quarter. Return on average equity of 16.73%, and an increase of 76 basis points from the prior quarter. Net interest margin of 3.70%, and increase of four 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. 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?

Thank you, James. And hello, everyone. Net interest income increased to $43.5 million, a 3% increase from Q4 of 2025, supported by both volume and margin expansion. Our net interest margin improved to $370 from $366 in the prior quarter, reflecting discipline 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 $266,000 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. And now I will hand it back to James for closing remarks.

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.

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. The first question today is from Evan Kwiatkowski with Raymond James. Please go ahead.

Hey, this is Evan on for David Feaster. Good morning, everybody.

Good morning, Evan. How are you?

I am doing well. I just wanted to start on the SoCal expansion. announced earlier. I know it's early innings, but 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 DeNovo expansion in Southern California alongside those hires and how you see that market evolving broadly.

Well, thank you for the question. We're very excited about the team that we brought on. We have four business development officers and two support staff. They're very competent. And so far, deal flow seems to be very, very strong from them. And it's a lot of fun for us engaging with them in a market which is just substantial, a much bigger market than Northern California, as you know. And so the deal flow that we're seeing right now are just great credits CNI-based, and we're excited about the opportunities that the team is presenting us. In terms of de novo operations or potentials, we have a team in Newport Beach right now, and then we have a team up in LA 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. But we want to see 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.

That's really helpful. I'm excited to see how that develops. And then maybe sticking on the growth side, origination is 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? And then maybe just curious where you're seeing the most opportunity for growth within specific segments as well.

Well, it's coming from a lot of different places in our existing business development people. We now have 46 of them working for the company. But during the quarter, it was 42. And everybody is producing. Everybody's doing quite well across our verticals that we have and also our geographies. So we're seeing substantial growth coming from all the way up into Redding, all the way down to Walnut Creek in the Bay Area. And 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. So 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. So in our manufacturing home and RV, folks are doing well also. But it's coming from a lot of different sources, which we're all very, very excited about.

That's great to hear. And 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? And if you see Any opportunities for additional funding cost leverage from here, especially given the prospect of no Fed cuts this year?

Right. We're going to continue to focus on reducing our wholesale deposit book with the desire to be out of it by 1231. Hopefully, we'll be able to do that more quickly. That's our plan. So that will provide... maybe some relief in our interest costs. And 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. And we're executing quite well on that in terms of bringing on new relationships. Non-interest bearing deposits saw a substantial growth in Q1. And so we hope to expect, we hope and expect, 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. But moreover, their focus is really on special districts. And they've done quite well in that space. And their pipelines remain very strong. So we're excited about that.

That's great. Thanks, guys. Great quarter. Thank you.

The next question is from Woody Lay with KBW. Please go ahead.

Hey, thanks for taking my question. I had a follow-up on deposits. You know, the focus is continuing to pay down wholesale deposits. But if I look over the past year, I mean, it's pretty incredible. the mix change that's undergone there. And it's just curious, is that being driven by some of these sub-verticals that's allowed you to grow core deposits? Is it new customers to the bank? Is it expanding the wallet of current customers? Just would kind of love your take on that.

Well, it's a great mix between deposit flow from existing customers, but also new relationships that we brought on. You know, often a deposit relationship or any banking relationship takes a while to mature. And so 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. And so that's exciting. But also, you know, our first three months have been very strong in terms of new deposit growth, in terms of new accounts. We're excited about that. And 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, all different types of verticals. And it is, it's very, 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. And hopefully we'll be out of broker deposits, as I mentioned, by 1231. and we certainly like to do that more quickly than by the end of the year, and we'll see how the second quarter goes.

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

Yeah, we don't know how much juice is left in terms of the impact of rates or have on our NIM. You know, we're kind of thinking it's settling in around 370, which is what it was for the quarter. But we do expect increase in net interest income to come from growth. And so that's kind of 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, four quarters. So we're settling in on this NIM range of 370 to 375. Hopefully we can maintain it there and just have net interest income being driven by growth.

Yeah. I appreciate the call. Maybe this lasts for me. on the growth you know loan growth remains really strong it feels like uh have heard just an anecdotal commentary across the industry of some increased competition especially among the bigger banks or are are you seeing that uh within your footprint well you know we've been doing this for quite some time and competition is always present and

And we've mentioned it in the script that competition is out there. And yeah, on good deals, people are fighting for them. And you've got to be careful that your growth is spread out amongst several relationships and your pricing is something that you can make money on. So we know it's going to be competitive for the best deals. And so that's our mindset when we come to work every day. And so we're winning our fair share. We're not winning everything. If we were winning everything, maybe we're not pricing it right. But we are winning our fair share. And 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, in total headcount, we just have more people, more biz dev people. So 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.

That all sounds good. Thanks for taking my questions.

You bet. The next question is from Andrew Terrell with Stevens. Please go ahead.

Hey, good morning.

Hey, good morning, Andrew.

I 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 kind of business line? And I would love to get a sense for, you know, where you're bringing on cost-wise the incremental dollar of core deposits. versus what's rolling off that we can see on kind of the wholesale side pricing-wise?

Sure. The growth in our government book in the first quarter was quite substantial, as I mentioned. It's about $190 million. So it really kind of drove what were the overall increases in deposits. But other verticals did also quite well. But that one kind of stands out. Now, that money that came in is really kind of priced right on top of our broker deposit book. So 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, that's, you know, for some of these counties, that's their liquidity. And we hope to, you know, bring on some non-interest-bearing deposits through that process with those, through those relationships. And we have, but a lot of that growth is really coming right at the margin.

And just for reference, just to compare the two, so, you know, our brokered book at the end of the quarter was sitting at about 382 for the actual brokered deposits. and then the late rate is about the 380 range. So we're pretty much just swapping dollar for dollar.

Yep, yep, okay, makes sense. And then on the non-interest bearing deposits, obviously, fantastic growth this quarter. Was there anything in the end of period figure for non-interest bearing that we can see? I think it was 1.23. Anything that was elevated specifically kind of at period end that's normalized in the second quarter so far? Is that kind of a good base to work off of? Just asking because it's a lot higher than the average.

Yeah, a couple things really kind of drove non-interest-bearing deposits. One, we do have a title company that's doing quite well, pretty big relationship. But 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. So we expect to continue to see growth in our Newport Beach office from those two folks that we brought on. So I think in combination of that and then also all the other CNI business that we've been doing, you know, up and down the platform that really kind of drove non-interest bearing deposits, but I think those two matters kind of stand out.

Yeah, yeah, okay. Then 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 pretty darn close to the deposit side already. You know, any updated expectations on pace of balance sheet growth or targets for the year?

Yeah, I think, you know, we guided pretty – pretty consistent with what we plan, our plan is, but obviously we exceeded that, which is a good thing. So we could probably see maybe 10% to 12% growth on both sides of the balance sheet, Andrew, for the remainder of the year. But 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. And their client base and prospect base is really very strong C&I operating companies, which will bring in some nice, non-interfering deposits. So I think that's kind of where we are right now on that, 10% to 12% growth, Andrew.

Yeah, okay. And if I could just ask one last one. If I kind of normalize the expense base, it looks like, you know, 18 for or so for the quarter, just a bit of thoughts on kind of expense run rate going forward.

Yeah, I think, you know, you could probably add to the normalized, like add back a million dollars to adjust for that release of the accrual. But if you add about half a million to that, We're still consistently kind of falling in that 148 to 155 range. And I think we'll stick to that probably for the next quarter or two.

Great. Thanks so much.

The next question is from Gary Tenner with DA Davidson. Please go ahead.

Thanks. Good morning. Just wanted to ask a follow-up, James, to your comments just a moment ago on the Newport office and bring in 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-sparing deposits?

No. I mean, you've got to – earnings credits are pretty robust in that space, and we've We're not doing anything in terms of earnings credit rate for those new customers, anything outside of what the market rates are. But there will be some expense associated with that based upon those earnings credits. So we fully expect that and have planned for it. So it has a cost, to your point, Gary.

All right. Thanks. Thanks for that. And then also 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? Just, Thinking about it from a different angle than maybe the last question.

We're investing in the business. We announced this month that we were 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 take the Bay Area for Gary, we're desirous of being in the South Bay, from Palo Alto all the way down to San Jose. So we're obviously looking at opportunities there. So we're going to continue to invest. And your question is, is the pace going to be consistent with what it's been in the past? And the answer, I think, is yes.

Yeah, I think we're following, you know, what's really worked well in the Bay is hiring smaller teams of people and smaller tranches of people. And, you know, we're starting to do that in Southern California as well. And that's worked really well for us, too, to integrate them into the company. And so, you know, I kind of think you're going to just have some stair-stepping. And we'll have some recess each quarter on what our new expectation for expenses are. But that likely will happen over the next year or two. Yeah. Mm-hmm.

Yeah, I mean, you've clearly developed a playbook that works for moving to new markets. So I appreciate the thoughts on that.

Thank you.

Again, if you have a question, please press star, then one. 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.

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.