On Tuesday, Five Star (NASDAQ:FSBC) discussed first-quarter financial results during its earnings call. The full transcript is provided below.

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Summary

Five Star reported Q1 2026 earnings per share of $0.87, a $0.04 increase from the previous quarter, with net income rising 6% to $18.6 million.

The company experienced annualized loan growth of 14% and deposit growth of 26%, driven by non-wholesale deposits.

Management highlighted a strong net interest margin of 3.70% and a decrease in the average cost of total deposits to 2.13%.

The company maintained strong asset quality with non-performing loans at just 7 basis points of total loans.

Strategic initiatives include expanding presence in Southern California with new hires and potential full-service offices.

Management expressed confidence in sustaining growth, aiming for 10-12% annual growth on both sides of the balance sheet.

The company remains committed to reducing wholesale deposits, focusing on stable, relationship-based core deposit funding.

Operational highlights include a 3% increase in net interest income and improvements in non-interest income and expense management.

Future guidance suggests continued investment in talent and technology, with a focus on expanding in key geographies and strengthening client relationships.

Full Transcript

OPERATOR

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 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 positions. 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 10K for the year ended December 31, 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 CEO)

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 7 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 Luck (Executive Vice President and Chief Financial Officer)

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 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 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 $1,000,000 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 $1,000,000 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.

James Beckwith (President and CEO)

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. 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.

Evan Kwiatkowski (Equity Analyst at Raymond James)

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

James Beckwith (President and CEO)

Good morning Evan. How are you?

Evan Kwiatkowski (Equity Analyst at Raymond James)

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 de novo expansion in Southern California alongside those hires and how you see that market evolving broadly.

James Beckwith (President and CEO)

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, 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, 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, Los Angeles 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.

Evan Kwiatkowski (Equity Analyst at Raymond James)

That's really helpful. I'm excited to see how that develops. And then maybe sticking on the growth side, originations were 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.

James Beckwith (President and CEO)

It's 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. And everybody is producing, everybody's doing quite well and across our verticals that we have and also our geographies. So we're seeing substantial growth coming from all the way up into Reading, all the way down to Walton Creek in the Bay Area. And our AG team also is doing quite well. So 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. 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.

Evan Kwiatkowski (Equity Analyst at Raymond James)

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 note rate, no Fed cuts this year.

James Beckwith (President and CEO)

Right. We're going to continue to focus on reducing our wholesale deposit book with a desire to be out of it by December 31. Hopefully we'll be able to do that more quickly. That's our plan. So that will provide maybe some relief in our interest cost 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, 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, 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.

Evan Kwiatkowski (Equity Analyst at Raymond James)

That's great. Thanks guys. Great quarter.

James Beckwith (President and CEO)

Thank you.

OPERATOR

The next question is from Woody Ley with kbw. Please go ahead.

Woody Ley (Equity Analyst at KBW)

Hey, thanks for taking my questions. 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, 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.

James Beckwith (President and CEO)

Well, it's a great mix between, you know, 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 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 a new account. So 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.

Woody Ley (Equity Analyst at KBW)

Yes, I appreciate the color there. And I would imagine paying down the brokered has been a positive to the net interest margin and 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 rate cuts could provide.

James Beckwith (President and CEO)

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 370 which 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. You know, it might move up a couple basis points but nothing substantial like we've seen for the last 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.

Woody Ley (Equity Analyst at KBW)

Yeah, I appreciate the caller. 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. Or are you seeing that within your footprint?

James Beckwith (President and CEO)

Well, you know, we've been doing this for quite some time and competition is always present and we mentioned it in the script that competition is out there. And yeah, on good deals people are fighting for them and you 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 that's our mindset when we, you know, when we come to work every day and so we're winning our fair share. We're not winning everything. Okay, if we were winning everything, maybe we're not pricing it right so. But we are, 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, and 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.

Woody Ley (Equity Analyst at KBW)

That all sounds good. Thanks for taking my questions.

OPERATOR

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

Andrew Terrell (Equity Analyst at Stevens)

Hey, good morning.

James Beckwith (President and CEO)

Good morning. Andrew

Andrew Terrell (Equity Analyst at Stevens)

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 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.

James Beckwith (President and CEO)

Sure. The Growth in our government book in the first quarter was quite substantial. As I mentioned, it's about 189, $190 million. So it was really, 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. So 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 broker deposits. And then the late freight is about the 380 range. So we're pretty much just swapping dollar for dollar.

Andrew Terrell (Equity Analyst at Stevens)

Yep, yep. Okay, makes sense. And then 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 at period end that's normalized in the second quarter so far. Is that kind of a good base to, to work off of just asking because it's a lot higher than the average.

James Beckwith (President and CEO)

Yeah, a couple things really kind of drove non interest bearing deposits. One, we do have 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 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.

Andrew Terrell (Equity Analyst at Stevens)

Yep, yep. Okay. And I've got to ask, 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 on the deposit side already. Any updated expectations on pace of balance sheet growth or targets for the year?

James Beckwith (President and CEO)

Yeah, I think 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, 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 and 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 book and their client base and prospect base is really very strong CNI operating companies which will bring in some nice non interest bearing deposits. So I think that's kind of where we are right now on that 10 to 12% growth. Andrew.

Andrew Terrell (Equity Analyst at Stevens)

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

James Beckwith (President and CEO)

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 500,000 to that, we're still consistently kind of falling in that 148 to 150 and I think we'll stick to that probably for the next quarter or two.

Andrew Terrell (Equity Analyst at Stevens)

Great, thanks so much.

OPERATOR

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

James Beckwith (President and CEO)

Good morning. Just wanted to ask a follow up James to your. Good morning. To your comments just a moment ago on the Newport office and bringing 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 interest bearing deposits? 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. But there will be some, you know, some expense associated with that based upon those earnings credits. So we fully expect that and have planned for it. So it's not, it has a cost to your point, Gary. All right, thanks for that.

Gary Tenner (Equity Analyst at DA Davidson)

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 etc. Just, you know, thinking about it from a different angle than maybe the last question.

James Beckwith (President and CEO)

It's, you know, we're investing in the business, you know, and we announced this month that we bringing on, I guess the announcement was five people, but we're actually bringing on six. So that's a substantial cost. These folks aren't cheap. And we'll continue to invest back in the business because, you know, take the Bay Area for Gary. You know, 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 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 community company. And so, you know, I kind of think you're going to just have some stair stepping and we'll have some resets each quarter on what our new expectation for expenses are, but that likely will happen over the next year or two.

Gary Tenner (Equity Analyst at DA Davidson)

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

OPERATOR

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.

James Beckwith (President and CEO)

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.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.