Five Star Bancorp Aktie

Welcome to the Five Star Bancorp Second Quarter 2026 Earnings Webcast. Please note, this is a closed conference call and you are encouraged to listen via the webcast. 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 31, 2025, and quarterly report on Form 10-Q for the 3 months ended March 31, 2026, and in particular, the information set forth in Item 1A, Risk Factors, in those reports. 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 close review on the company's website under the Investor Relations tab.

Please note this event is also being recorded. I would now like to turn the conference 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 the second quarter of 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. Before we discuss the results of the second quarter of 2026, we wanted to note that, as you may be aware, we also announced yesterday the pricing of an underwritten public offering of shares of our common stock. Further information, when available, will be accessible in our SEC filings. As the offering has not yet settled, today we will present only financial results for the second quarter of 2026 and will not be conducting a Q&A session today.

Q2 2026 was another period of strong performance, reflecting the continued execution of our organic growth strategy and the strength of our relationship-driven model. Net income increased to $19.4 million compared to $18.6 million in the first quarter of 2026. Earnings per share rose to $0.91 per share, up $0.04 from Q1 2026, and up $0.23 from the second quarter of 2025. Total loans held for investment grew by $306.3 million, or 29% on an annualized basis and total deposits grew by $330 million, or 30% on an annualized basis.

We are also pleased to report that during the quarter, Five Star Bank was honored to be named the #1 Best Place to Work by the San Francisco Business Times among participating businesses with 25 to 49 employees in the San Francisco Bay Area. This recognition reflects our purpose-driven culture, which is a meaningful differentiator and an important contributor to our continued performance. In April, we announced the expansion of our business in Southern California with the addition of 5 seasoned banking professionals to lead our efforts across the Greater Los Angeles area. Building on our existing administrative office in Newport Beach, this team brings deep local expertise and a proven track record of serving middle-market businesses.

With plans to open an additional Southern California office later this year, we believe we are well positioned to deliver Five Star Bank's high-touch concierge banking services to the clients and communities of Greater Los Angeles. We also continue to execute on our footprint expansion with the opening of our newest full-service branch in Lodi on July 13. This market is a natural fit for Five Star Bank, home to a prominent agricultural economy and a growing base of small to mid-sized businesses, well suited to our relationship-driven model. The Lodi branch further strengthens our food, agribusiness, and diversified industries vertical and reflects our ongoing commitment to deepening our presence in California's high-growth regional markets. Together, these recent expansions have solidified Five Star Bancorp's growing footprint across the Golden State.

Financial highlights during Q2 2026 included net income of $19.4 million, up 4% from the prior quarter. Return on average assets of 1.49% compared to 1.55% in Q1 2026. Return on average equity of 16.67% compared to 16.73% in Q1 2026. Net interest margin of 3.63%, a decrease of 7 basis points from the prior quarter, and average cost of total deposits of 2.16%, an increase of 3 basis points from the prior quarter. Our Q2 results were driven by robust loan and deposit growth. Loans held for investment grew by $306.3 million, or 29% on an annualized basis, reaching $4.5 billion at June 30, 2026. Total deposits grew by $330 million, or 30% on an annualized basis, with non-wholesale deposits up $463.1 million, more than offsetting the $133.1 million reduction in wholesale deposits.

This shift reflects our continued focus on building a stable, relationship-based, core deposit funding base. Non-wholesale deposit accounts constituted approximately 94.79% of total deposits at June 30, 2026, up from 91.43% at March 31, 2026. Our asset quality remains strong with some movement during the quarter. Ratio of non-performing loans increased to 0.30% at June 30, 2026, up from 0.07% at March 31, 2026. This increase was attributable to one Community Reinvestment Act loan that was placed on non-accrual status during the period. The balance of the loan is $11.4 million as of June 30, 2026, and was originally downgraded to substandard in 2025. The loan is well collateralized, and a current appraised value provides significant cushion in excess of the carrying amount of the loan. We recorded a $2.3 million provision for credit losses during the quarter, primarily related to loan growth.

We remain well capitalized with all capital ratios above regulatory thresholds, including a common equity Tier 1 capital ratio of 9.98% and a Tier 1 leverage ratio of 9.21% as of June 30, 2026. We remain committed to delivering value to our shareholders. In Q2, we paid a cash dividend of $0.25 per share and declared an additional $0.25 cash dividend expected to be paid in August of 2026. Total assets increased by $345.3 million during the quarter, largely driven by loan growth within the commercial real estate portfolio, which grew by $175.3 million, and $124.5 million in purchased loans within our consumer section of the portfolio. Year-over-year, total assets grew from $4.4 billion to $5.4 billion, a meaningful reflection of the organic growth we have sustained across our markets. Cash and cash equivalents stood at $685.1 million at June 30, 2026, representing 14.2% of total deposits.

Ongoing uncertainty surrounding geopolitical tensions, energy market instability, and uncertainty around the pace and direction of the Federal Reserve monetary policy have contributed to a more volatile interest rate environment. We believe we are well positioned to navigate these conditions, as approximately 74% of our loans held for investment are adjustable or floating, providing meaningful flexibility to respond to market shifts. Our prudent underwriting standards, comprehensive loan monitoring, and focus on relationship-driven lending have contributed to maintaining strong credit quality. Our allowance for credit losses totaled $47.3 million at June 30, 2026, up from $44.4 million at December 31, 2025, reflecting a $4.6 million provision for credit losses recorded during the first half of the year, partially offset by $1.6 million in net charge-offs, primarily related to commercial and industrial loans.

The allowance as a percentage of loans held for investment was 1.05% at June 30, 2026, compared to 1.09% at December 31, 2025. The increase in total liabilities during the quarter was a result of growth in interest-bearing deposits, reflecting inflows from new accounts and existing relationships. Non-wholesale deposits increased by $463.1 million, while wholesale deposits decreased by $133.1 million, a reflection of our ongoing strategy to deepen core deposit relationships and reduce reliance on wholesale funding. Non-interest-bearing deposits accounted for approximately 24.5% of total deposits as of June 30, 2026, a reflection of the full relationship banking we continue to cultivate. This is supported by the growth of our Business Development Officer team, which grew from 43 to 45 during the quarter, driving continued relationship expansion across our markets and verticals.

Approximately 64% of our total deposit relationships total more than $5 million, with an average tenure of approximately 7 years. We view this stable, long-tenured deposit base as a durable foundation for our continued 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 $46.1 million in Q2 2026, a 6.04% increase from $43.5 million in Q1 2026. Net interest margin contracted by 7 basis points quarter-over-quarter to 3.63%, reflecting that strong quarter-over-quarter growth in net interest income was primarily volume-driven as rapid balance sheet expansion modestly diluted the overall yield in earning assets. Interest income increased by $5 million from the previous quarter, primarily due to a 4% increase in the average balance of loans and a 32% increase in the average balance of interest-earning deposits in banks. This was partially offset by a $2.4 million increase in interest expense, driven by a $330.1 million increase in average deposit balances, combined with a 3 basis point increase in the average cost of deposits. Growth in the average balance of non-interest-bearing deposits by $41.9 million helped partially offset the rise in deposit funding costs.

Non-interest income increased to $1.9 million in Q2 2026 from $1.6 million in Q1 2026, primarily driven by an improvement in earnings related to investments in venture-backed funds, partially offset by a decrease in fees from swap referrals and lower FHLB stock dividends. The latter due to FHLB's transition to a tiered-based dividend structure and a special cash dividend received in Q1 2026, which did not reoccur in the second quarter. Non-interest expense increased by $2.2 million in Q2 2026 compared to Q1 2026, primarily due to a $1 million loss contingency release on an SBA loan that benefited Q1 and did not reoccur during Q2. We also had increases in advertising and promotional expenses and data processing costs tied to organizational growth. Our efficiency ratio was 40.91% for Q2 2026 compared to 38.57% in Q1 2026 and 41.03% for Q2 2025, reflecting disciplined expense management even as we continue to invest in growth. Our provision for income taxes increased by $300,000 compared to the prior quarter, primarily due to an increase in taxable income. And now I'll hand it back to James for closing remarks.

Thank you, Heather. Five Star Bank's performance this quarter reflects the continued strength of our client relationships and the dedication of the professionals who support them. Our ongoing investment in technology, operating discipline, conservative underwriting standards, and rigorous portfolio management remain central to our commitment to creating sustainable value for our customers, employees, communities, and shareholders. With the first half of 2026 behind us, we are encouraged by the results we have delivered and confident in our position rolling into the second half of the year. We remain disciplined in our approach to growth and managing risk as we continue executing on our strategic priorities, which are deepening client relationships, expanding our footprint in key markets, and making targeted investments in technology and talent that support Five Star Bank's long-term performance.

As we close today, we want to thank our shareholders, our clients, and employees for your continued trust and partnership. The results we have presented this quarter reflect the strength of the relationships we have built and the consistent execution of our team across our markets. Looking ahead, we remain focused on disciplined growth, sound risk management, and deepening the client relationships that are the foundation of our performance. We are confident in our ability to continue delivering value for all of our stakeholders in the quarters ahead. We look forward to speaking with you again in October to discuss Q3 earnings. Thank you for listening, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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. [Operator Instructions]

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 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.

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, the 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 nonperforming 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 nonperforming 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 noninterest-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 totaled more than $5 million. These deposits have a long tenure with the bank with an average age of approximately 8 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 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 $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 noninterest-bearing deposits combined with a decrease in the cost associated with deposits, resulted in a net decrease in total interest expense.

Noninterest 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 3 months ended March 31, 2026, partially offset by an overall decline in earnings related to investments and venture-backed funds. Noninterest expense decreased by $263,000 in the 3 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 head count 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 a 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 Instructions] The first question today is from Evan Kwiatkowski with Raymond James.

This is Evan on for David Feaster. 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?

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 confident. 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 rate credits, C&I-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 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. But 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.

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?

Well, it's coming from a lot of different places. 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 is 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 Walnut Creek in the Bay Area, and our ag team also is doing quite well. So we're -- 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 was good to see the growth during the quarter, which allowed you to pay down some wholesale funding. I'm just curious 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 12/31. 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 -- 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, noninterest-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.

Our next question is from Woody Lay with KBW.

I had a follow-up on deposits. 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 I was 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. Often, a deposit relationship or any banking relationship takes a while to mature. And 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, our first 3 months have been very strong in terms of new deposit growth in terms of new accounts. So we're excited about that. And again, it's really -- our government book has done quite well, but it's really our growth in deposits is coming from all different types of verticals. And it is -- it's very -- 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 6 months with that. And hopefully, we'll be out of broker deposits, as I mentioned, by 12/31. 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.

Yes. I appreciate the color there. And I would imagine paying down the broker 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, especially if assume cuts are flat and then kind of the incremental impact that rate cuts could provide?

Yes. We don't know how much juice is left in our -- in terms of the impact of rates. or have on our NIM. We're kind of thinking it's settling around -- in and around 3.70%, 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, it might move up a couple of basis points, but nothing substantial like we've seen for the last 4 quarters. So we're settling in on this NIM range of 3.70% to 3.75%. Hopefully, we can maintain it there and just have net interest income being driven by growth.

Yes. I appreciate the color. And maybe just last for me on the growth, 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?

Well, 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 yes, on good deals, people are fighting for them. And you got to be careful that your growth is spread out a bunch of -- 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 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, but we are winning our fair share. And the function of our growth, what's really driving our growth. It's just the number of people we have, the boots on the ground, so to speak, Woody. Relative to our size 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.

The next question is from Andrew Terrell with 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 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?

Sure. The growth in our government book in the first quarter was quite substantial, as I mentioned, it's about $190 million. So it's 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 we're -- that's -- for some of these counties, that's their liquidity, and we hope to bring on some noninterest-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 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. So we're pretty much just swapping dollar for dollar.

Yes. Okay. Makes sense. And then on the noninterest-bearing deposits, obviously, fantastic growth this quarter. Was there anything in the end-of-period figure for noninterest-bearing that we can see, I think it was 1.23. Anything that was elevated, specifically kind of a 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.

Yes. A couple of things really kind of drove noninterest-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 noninterest-bearing. So we expect to continue to see growth with our -- 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 C&I business we've been doing up and down the platform that really kind of drove noninterest-bearing deposits. But I think those 2 matters kind of stand out.

Yes. Yes. 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 to the deposit side already. Any updated expectations on pace of balance sheet growth or targets for the year?

Yes. I think we guided pretty pretty consistent with what we plan -- our plan is. And -- 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. And with the bringing on in 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 C&I operating companies, which will bring in some nice noninterest-bearing deposits. So I think that's kind of where we are right now on that 10% to 12% growth, Andrew.

Yes. Okay. And if I could just ask one last one. If I kind of normalize the expense base, it looks like $18.4 million or so for the quarter. Just updated thoughts on kind of expense run rate going forward.

Yes. I think you could probably add to the normalized, like add back $1 million to adjust for that release of the accrual. But if you add about $0.5 million to that, we're still consistently kind of falling in that $148 million to $155 million range. And I think we'll stick to that probably for the next quarter or 2.

Next question is from Gary Tenner with D.A. Davidson.

I just wanted to ask a follow-up, James, to your comments just a moment ago on the Newport office and bringing escrow comping deposits. Does any of that start leaning into deposits that start showing up on the expense line from any kind of earnings credit or is there anything like that? Or are these pure noninterest-bearing deposits?

No. I mean you've got to -- the 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 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. And then also a follow-up, I guess, on the expenses in general. I mean you've been -- year-over-year expense is up about 20% first quarter to first quarter adjusted for that $1 million 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, then maybe the last question.

It's -- we're investing in the business. And we announced this month that we are 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 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.

Yes. I think we're following -- what really worked well in the Bay is hiring smaller teams of people and smaller tranches of people and 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. And so I kind of think you're going to just have some stair-stepping and we'll have some reset each quarter on what our new expectation for expenses are. But that likely will happen over the next year or 2.

Yes.

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

[Operator Instructions] I'm 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 shared 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Welcome to the Five Star Bancorp Fourth Quarter and Year-End Earnings Webcast. Please note, this is a closed conference call, and you are encouraged to listen via the webcast. [Operator Instructions]

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 31, 2024, and quarterly reports on Form 10-Q for the 3 months ended March 31, 2025, June 30, 2025, and September 30, 2025, and in particular, the information set forth in Item 1A, Risk Factors in those reports.

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 measures 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 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 the fourth quarter and year ended December 31, 2025. 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.

2025 was another outstanding year of achievement underpinned by exceptional growth across all of the markets we serve and consistent strong financial performance. During 2025, we expanded our footprint in the San Francisco Bay Area through the opening of our Walnut Creek office. We expanded our agribusiness vertical, and we also added 10 more seasoned business development professionals to facilitate ongoing organic growth.

In 2025, Five Star Bank achieved year-over-year growth in total loans held for investments of 15%, total deposit growth of 18%, net income growth of 35% and an increase in earnings per share of 28% to $2.90 a share.

Financial highlights for the fourth quarter include $17.6 million in net income, earnings per share of $0.83, return on average assets of 1.50% and return on average equity of 15.97%. Our net interest margin expanded 10 basis points to 3.66% and our total cost of deposits declined by 21 basis points to 2.23%. Our efficiency ratio was 40.62% for the fourth quarter.

Financial highlights for the year included a $61.6 million of net income, earnings per share of $2.90, return on average assets of 1.41% and return on average equity of 14.74%. Our net interest margin expanded by 23 basis points to 3.55% and our cost of total deposits declined 16 basis points to 2.40%. Our efficiency ratio was 41.03% for the year.

In the fourth quarter, we saw continued balance sheet growth. Loans held for investment grew by $187.7 million or 19% on an annualized basis and total deposits increased by $97.6 million or 10% on an annualized basis. Over the course of the year, we experienced outstanding balance sheet growth. Loans held for investment grew by $542.2 million or 15% and total deposits increased by $643.1 million or 18%. We successfully reduced our balance of wholesale deposits by $95 million or 17% in 2025, and we grew our balance of non-wholesale deposits by $738.1 million or 25%.

Our asset quality continues to remain strong with nonperforming loans representing only 8 basis points of total loans held for investment. We continue to be well capitalized with all capital ratios well above regulatory thresholds for the quarter and year. Our strong financial performance and dedication to delivering shareholder value drove an increase to our cash dividend of $0.05 per share for a total dividend of $0.25 per share for the quarter. This is the first increase in the dividend since April 2023. The dividend is payable to the company's shareholders of record as of February 2, 2026, and is expected to be paid on February 9, 2026.

Our total assets increased during the fourth quarter and full year by $113.1 million and $701.6 million, respectively. This growth was largely driven by loan growth within the commercial real estate portfolio, which increased by $161.4 million in the fourth quarter and $448.5 million in the year. Our loan pipeline remains strong. Our prudent underwriting standards, comprehensive loan monitoring and focus on relationship-driven lending have contributed to maintaining the strong quality of our loans. As a result, we have a very low volume of nonperforming loans despite an increase of $1.0 million during the fourth quarter related to 2 separate faith-based real estate loans entering nonperforming status.

We recorded a provision of $2.8 million for credit losses during the fourth quarter, primarily related to loan growth for the total provision of credit losses of $9.7 million for the year ended December 31, 2025. Growth in our total liabilities during the fourth quarter and full year was a result of growth in interest-bearing and noninterest-bearing deposits related to both new accounts and inflows from the existing customer base.

Non-wholesale deposits increased $139.1 million during the quarter and $738.1 million during the year. Wholesale deposits decreased by $41.4 million during the quarter and $95 million during the year. Total noninterest-bearing deposits accounted for 26% of total deposits. Approximately 61% of our deposit relationships totaled more than $5 million. These deposits have a long tenure with the bank. With an average of 8 years, we believe our deposit portfolio to be a stable funding base for future growth.

On that note, I will now hand it over to Heather to discuss the results of operations. Heather?

Thank you, James, and hello, everyone. Net interest income increased $2.7 million or 7% from the previous quarter, primarily due to a $1.8 million increase in loan interest income driven by new loan production and a $1.1 million decrease in interest expense. The decline in interest expense is primarily related to a 21 basis point decline in the average cost of deposits quarter-over-quarter driven primarily by 2 rate cuts occurring in the 3 months ended December 31, 2025. The average balance of deposits increased by 4% during the 3 months ended December 31, 2025, but the substantial decrease in the cost associated with deposits led to a net reduction in total interest expense.

Net interest income increased by $32.2 million or 27% from 2024, primarily due to a $35.9 million increase in loan interest income driven by new loan production at higher rates, contributing to overall improvement in the average yield on loans. This was partially offset by a $10 million increase in deposit interest expense related to a 19% increase in the average balance of deposits during the year. The average cost of deposits was 2.40% for the year ended December 31, 2025, a decrease of 16 basis points compared to the prior year, which helped to moderate the increase in interest expense related to deposit growth.

Noninterest income decreased to $1.4 million in the fourth quarter from $2 million in the previous quarter, primarily due to an overall decline in earnings related to equity investments and venture-backed funds during the 3 months ended December 31, 2025, compared to the prior quarter. Noninterest income increased by $100,000 in 2025, primarily due to an increase from fees from swap referrals and income from credit card activity, an improvement in earnings related to equity investments and venture-backed funds and an increase on earnings on bank-owned life insurance related to the purchase of additional policies.

These gains were almost entirely offset by a lower gain on sale of loans, which declined due to the strategic reduction in origination of loans held for sale during the year. For the 3 months ended December 31, 2025, there was a $1.1 million increase in noninterest expense. And for the full year ending that date, the increase amounted to $10.5 million. The primary driver for higher noninterest expense was related to an increase in headcount, leading to elevated salaries and benefits.

Provision for income taxes for the quarter ended December 31, 2025, decreased by $500,000 or 9% as compared to the prior quarter due to a $900,000 benefit recorded during the fourth quarter related to the purchase of transferable tax credits. This was partially offset by an increase in pretax income recognized during the quarter and an adjustment related to the true-up of amortization expense related to low-income housing tax credits during the 3 months ended December 31, 2025. The provision for income taxes increased by $3.1 million or 16% for the year ended December 31, 2025, as compared to the prior year due to a 29% increase in pretax income recognized during the year. This is partially offset by a $900,000 benefit recorded during the quarter related to the purchase of tax credits.

And now I will hand it back to James for closing remarks. James?

Thank you, Heather. 2025 was an outstanding year of achievement for Five Star Bank. As we not only celebrated our 25th year in business, but also reflected on a quarter century of growth, innovation and commitment to our core values. Since our founding, Five Star Bank has steadily evolved from a [ small ] entrepreneurs into a $4.8 billion financial institution with 9 branches and over 230 employees. This remarkable expansion is a testament to our enduring dedication to authentic relationship-based service, a philosophy that places the needs of our customers, the well-being of our employees and communities and the interest of shareholders at the heart of everything we do.

Throughout these 25 years, Five Star Bank has consistently prioritized building deep, meaningful relations with our clients, understanding that true success comes from trust, transparency and mutual benefit. Our employees play a crucial role in this journey, embodying our values through personalized service, expert financial guidance and active participation in the community initiatives. We take immense pride of our achievements, which include not only financial growth, but also positive impacts on the local economies, support for small business and contributions to the social and environmental causes.

Looking ahead to 2026 and beyond, our vision remains steadfast. We are committed to further developing all of our business verticals while expanding our reach into new markets. It is increasingly -- in an increasingly digital world, we recognize the importance of blending cost-cutting technology with the human touch that defines Five Star Bank's high-tech and high-touch approach to business.

As we move forward, Five Star Bank will remain focused on innovation and service excellence. We are excited about the opportunities ahead and are confident of our proven strategy will drive continued growth, strength in client relations and creating lasting value for our shareholders.

We appreciate your time today. This concludes today's presentation. Now we will be happy to take any questions you might have.

[Operator Instructions] And the first question today will come from David Feaster with Raymond James.

I wanted to start on the origination side. You saw a real nice acceleration in originations this quarter. I just wanted to -- I was hoping you could give us maybe a sense of some of the drivers behind it? I know it's hard to peg, but how much of that growth is from new hires versus increasing demand? And then just any thoughts on how pipelines are shaping up heading into the new year and where you're seeing opportunity for growth?

Sure. We saw all of our verticals perform extremely well in the fourth quarter. Our ag -- our food and ag group did extremely well in terms of onboarding some clients whose lending cycle, if you will, is kind of gears up during the fourth quarter, especially in some of our nut tree processing clients who are paying growers. So that was a significant component. So it's seasonal in nature. But also some of the deals that we did down in the Bay Area, I think we had a fair amount of volume that came out of that. But across all of our geographies and our verticals, it was a very big quarter for loan production. Now as we enter into 2026, the pipeline looks good. It's been higher, it's been lower, but it looks good as we roll into 2026, David.

Okay. That's great. And maybe just switching to the other side of the balance sheet, your deposit growth has been phenomenal. You've done a great job driving core deposit growth and reducing the wholesale funding and significantly improved your deposit costs. I just wanted to -- I was hoping you could touch on, first, the competitive landscape for deposits from your perspective today? And then just how you think about core deposit growth going forward and your ability to continue to fund your outsized loan growth with core deposits?

Sure. Well, the markets that we're in right now are very competitive. For the best clients that [ I'm going ] to see the Tier 1 clients, if you will, or prospects, it's a very competitive space. And it doesn't really matter what geography you're in. It's just competitive. And so we don't expect that to change. But our secret sauce, David, is the fact that we've got 42 business development folks that -- that's their job is to bring in core deposit and core relationships into the bank. We feel that's our competitive advantage.

We brought some folks in down in Orange County that are deposit gatherers. They're starting to see a fair amount of traction down there. We've got folks that are in the Bay Area that are primarily deposit -- have a deposit orientation, they're doing well. But we also saw great growth in North State in our Redding office and also our Yuba City office. So we're excited about what that might mean for 2026. We seem to be doing fine so far. So we expect that we'll be able to continue to execute. Don't think we're going to be able to do what we did in 2026, what we did in 2025, David. That's just -- that's asking a lot.

And a lot of things [ are ] away so we're projecting on both sides of the balance sheet, 10% growth as we roll into 2026. If we can achieve that, which is really quite substantial, we're happy with that. A couple of drivers of that is that on the loan side, we expect a fair amount of payoffs. We saw a fair amount of payoffs in the fourth quarter. And we expect the same or similar that we're going to see in 2026. So we're going to have to run that much harder.

And then on the deposit side, we're trying to get rid of all of our wholesale -- excuse me, our broker deposits. And that's $175 million as we ended the year. And so in order to grow total deposits by 10%, I think what is it, Sarah, we're going to have to grow by 13 or so percent? So we're going to have to hustle in order to achieve those types of goals for us as we enter into 2026.

Okay. And one of the things that supported your growth has really been your hiring efforts. I mean you talked about adding 10 BDOs this year. You've had a lot of success. I got to imagine what you guys are doing is resonating in the market. I mean it's -- you guys are putting up pretty -- it's just -- it's fun growing like you guys are, and I know you're getting recognized. I'm just curious, there's still a lot of disruption across your footprint in Northern California. How do you think about your ability to continue to recruit bankers and BDOs? And are there any markets or segments that you're notably focused on or expanding into?

Sure. I think we did a nice job with the East Bay and our Walnut Creek opening. It's a nice office. We expect that to grow. But when you consider about what we're doing down in the Bay Area, we're not yet on the Peninsula or South Bay. So that certainly would be an area from a geographical perspective that's of interest to us, highly competitive in terms of getting qualified bankers to come work for you. And frankly, a lot of those salaries have been bid up. And it's not a bad time to be a business development and a seasoned business development person in the Bay Area. Let me tell you that much.

The next question will come from Andrew Terrell with Stephens.

Maybe if I could just start on expenses, Heather, hoping you could help us out with just kind of thoughts on the expense run rate into the first quarter. And if I look back at 2025, you guys grew, I think it was around high teens on overall expenses. You obviously had a pretty tremendous amount of revenue growth as well throughout the year. But just as we look out into 2026, any thoughts on kind of where the expense growth head? Should it moderate from here or stay elevated as you guys keep hiring and continue making investments?

Yes, sure. So from a dollars perspective for Q1, you could probably add about $300,000 to that expense amount. We do have plans that have brought on a few new people into our group. So that will help support that. But if you look at the full year for 2026, I think our target for a range on expenses as a percent of total assets or average assets, should be like 1.48% to 1.55% in that range. And we believe that, that will help accommodate growth as well as regular maintenance on there, too. So I think that range for 2026 would be 1.48% to 1.55%.

I think, Heather, what we end the quarter at or in the year at -- we're right at 1.50%?

Yes, the quarter was at 1.50% average assets.

That's something that we think about constantly, Andrew, in just terms of a percentage to total assets. And it's not a bad guide as we continue to grow.

Yes. Okay. Yes, you guys have stayed pretty consistent in that band we've talked about for a while. Okay. James, I wanted to get a sense from you just on competitive dynamics on rate competition on loans specifically. I know you guys do have somewhat of a repricing story as we move forward. Just wanted to get a sense on where new originations are coming at -- coming on that from a yield standpoint. We've heard from several of your peers, just the competition they're seeing on the loan side is impacting spreads. I'm just curious what you're seeing.

Yes. I think we're seeing the same thing, but we have the -- an ability to generate new credit within our MHC and RV efforts that usually will allow us to get our normal spreads, which could be anywhere between 275 to 350 over the 5 years. So we have a competitive advantage from that perspective because it's just not a lot of players in that market. But if we're going toe to toe with folks on an owner-occupied real estate and line of credit for an operating entity, it can be very competitive. And you could see spreads as low as 200 over 205 over and at prime or prime minus 25 even for their operating line. So it's constant.

There's a lot of folks that are interested in the -- certainly in the Bay Area that have come in. And so we've -- it's a highly competitive environment and not just in the Bay Area, but up and down the Valley, the capital region. So we recognize this. There is pressure. We do have a lot of refinancings coming up in '26 and those fundamentally from everything that we did in '21 since we have, for the most part, our MHC and RV and probably outside of that, too, anything with the CRE patina to it, it's a 5-year reset, usually a 25- or 30-year [ ammo due ] in 10 with one reset after the 60th month. So big years of origination, you're going to have some resets happen.

We don't expect all those loans to stay with us. A lot of those operators are going to take their loans to agency because they can get a better deal, lose the personal guarantees, take cash out. So we just -- it's going to have an impact to us. So a lot of those credits were 4 handles in terms of interest rates. So we're going to see a lot of that happen in 2026. Hopefully, we can keep up to half of them, okay? But they're going to reset, and we'll just see how that goes. We're actively -- I'm going to say, because they have other credits with it. We're actively in those discussions about what they're going to do when their loans reset.

Yes. Got it. Okay. I appreciate all the color there. And if I could just ask one more. You leveraged capital a little bit this quarter with the strong growth. I think your CET1 down around 10.5% now, maybe 10.6%. But I just wanted to get your sense on comfortability with capital as it stands today and kind of the outlook. I'm sure organic earnings can fund kind of 10% growth rate. But just wanted to get your thoughts on the current position and kind of capital expectations.

Sure. We had outsized growth in 2025. So you saw a decline in our capital ratios. But as we go forward, we believe that we'll be able to maintain our capital positions with a 10% growth. We do anything like 15% growth. I think that's another matter. But I think we like where we are. We need to be highly profitable so we can fund our growth. And I think we -- we'll be able to do that in terms of what we see in front of us in 2026 from a profitability perspective. So we'll just see how that goes, Andrew. If we have outsized growth that's another conversation.

Yes. If we stick to that 10% growth rate throughout our entire forecast period, we usually budget on a 5-year forecast. We are able to sustain ourselves and fund ourselves through that even with the elevated dividend that we just announced recently. But if we did grow like 15% to 20%, that clearly will accelerate capital needs, and we won't be able to self-generate. So we would likely have to have a capital event sometime in '27 or '28, depending on how fast that growth happens.

The next question will come from Gary Tenner with D.A. Davidson.

I wanted to dig a little bit into kind of the efficiency ratio. I know you talked about the expense-to-asset ratio earlier in the call. But as I'm thinking about the margin expansion kind of outlook, thinking that NII should run somewhat ahead of your loan growth outlook and balance sheet outlook, it seems like it will be kind of in line with the expense side of things. So I'm just wondering, with your efficiency ratio at 40%, down a little bit from a year ago, is there any -- is there much more room to push that lower? Or is it really just making $1 on every $0.40 from here?

Well, I think it's probably more the latter. And we have -- because we're constantly investing in our business. We're constantly growing our front end, adding more [ biz dev people ], and they're expensive. And we're constantly throwing coal into the boiler and trying to maintain our growth rates. As we get bigger and bigger, doing 10% is harder to do because the numbers are just bigger. But -- so we think that constantly having some form, Gary, of investment in the business in the form of new front-end people, which has a rippling effect across our cost structure because you hired some more biz dev folks, you've got to have some backup from a depository perspective. And then, of course, you got to have a few more lenders that will be able to underwrite their business. So that's how we think about it.

It really starts with the folks that are on the front end. And we're not backing off. If we see a team that we think we can get, Gary, we're going to do it. And I think that's evidenced in what we've been able to do over the last 3, 4 years. So we're reinvesting. We're constantly reinvesting in our business. Imagine -- I think our profitability would be a lot higher if we didn't do that. But this is really a long-term play for our shareholders. And so we're a long-term organic growth shop, and we want to maintain that focus.

Appreciate that, James. And then just as it relates to kind of the near-term outlook, the ability to generate that kind of 10% threshold of loan growth or really both sides of the balance sheet, is that -- do you have the headcount to accommodate that or to accomplish that today? Or is there any assumption that there's adds early in the year that help generate some of that growth? Or is it basically kind of -- is it based on the current team, I guess, is the question?

Kind of based on the current team. Wouldn't you say, Heather?

Yes, I think so. We really have -- if you think about it, we've -- in the Bay Area specifically, we've been hiring in tranches. And so it started in 2023, but we continue to add headcount as we go. So we have new hires. We hired 12 BDOs in 2025, and it does take some time to really understand our system, our platforms, our processes to really get their feet under themselves to run hard. And so they'll come online. But really, I think 10% growth is achievable with the current team that we have in place.

[Operator Instructions] No further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you. We are proud to have achieved another quarter and year of significant organic growth, built on a strong foundation of client service, expanded relationships and products and the loyalty of our exceptional clients. We will always remember that we exist because of our clients' trust us, and we believe in them. We will continue to answer the call of businesses and organizations who desire a time-honored banking partner through the geographies and verticals we serve.

Five Star Bank is here to stay. It is our privilege 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 April to discuss the earnings for the first quarter of 2026. Have a great day, and thank you for listening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Welcome to the Five Star Bancorp Third Quarter Earnings Webcast. Please note, this is a closed conference call, and you are encouraged to listen via the webcast. [Operator Instructions]

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 31, 2024, and quarterly reports on Form 10-Q for the 3 months ended March 31, 2025, and June 30, 2025, and in particular, the information set forth in Item 1A, Risk Factors in those reports.

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 close reviewing on the company's website 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 the third quarter of 2025, which were released yesterday. The release is available on our website at fivestarbank.com under the Investor Relations tab. Joining me today is Heather Luck, Executive Vice President and Chief Financial Officer.

Our third quarter results include outstanding growth in loans and core deposits attributable to our differentiated client experience and organic growth strategy. We maintain our unwavering commitment to clients and community partners throughout Northern California.

Financial highlights during the third quarter include $16.3 million of net income, earnings per share of $0.77, return on average assets of 1.44% and return on average equity of 15.35%. Our net interest margin expanded 3 basis points to 3.56% and our cost of total deposits declined by 2 basis points to 2.44%. Our efficiency ratio was 40.13% for the third quarter.

During the third quarter, we saw continued balance sheet growth as loans held for investment grew by $129.2 million or 14% on an annualized basis. Total deposits increased by approximately $208.8 million or 21% on an annualized basis. During the quarter, non-wholesale deposits increased by $359 million or 11%, while wholesale deposits decreased by $150.2 million or 23%.

Our asset quality remains strong with nonperforming loans representing only 5 basis points of total loans held for investment. We continue to be well capitalized, with all capital ratios well above regulatory thresholds for the quarter. On October 16, our board declared a cash dividend of $0.20 per share on the company's common stock, expected to be paid in November. We continue to deliver value to our shareholders.

Our total assets increased during the third quarter by $228.3 million, largely driven by loan growth within the commercial real estate portfolio, which grew by $77.7 million. Our loan pipeline remains strong. The credit quality of loans remained strong due to our conservative underwriting practices, robust monitoring throughout the life of a loan and our relationship-based approach to lending. As a result, we have a very low volume of nonperforming loans, which declined by $149,000 during the third quarter. We recorded a $2.5 million provision for credit losses during the quarter, primarily due to loan growth.

The increase of our total liabilities during the third quarter was a result of growth in interest-bearing and noninterest-bearing deposits related to new accounts. The new interest-bearing deposit accounts contributed to $171.6 million of overall growth. New noninterest-bearing deposits contributed to $28.8 million of overall growth. Noninterest-bearing deposits remained consistent at 26% of total deposits as of September 30, 2025. Approximately 60% of our deposit relationships totaled more than $5 million. These deposits have a long tenure with the bank with an average age of 8 years. We believe our deposit portfolio to be stable funding base for our future growth.

And now I will hand it over to Heather to present the results of operations. Heather?

Thank you, James, and hello, everyone. Net interest income increased $2.8 million from the previous quarter, primarily due to a $4.3 million increase in interest income, driven by new loan production at higher rates, contributing to overall improvement in the average yield on loans. This was partially offset by a $1.4 million increase in interest expense related to core deposit growth during the quarter of $359 million, which exceeded the $150.2 million of higher-cost wholesale deposits maturing during the quarter.

Noninterest income increased to $2 million in the third quarter from $1.8 million in the previous quarter primarily due to an increase in swap referral fees recognized during the 3 months ended September 30, 2025, and partially offset by no gain on sale of loans recognized during the quarter in connection with our strategic shift to reduce wholesale SBA loan production and sales.

Noninterest expense grew by $900,000 in the 3 months ended September 30, 2025. This is primarily due to an increase in salaries and employee benefits related to increased head count to support customer-facing and back-office operations. We continue to invest in our Bay Area expansion, evidenced by the opening of our newest full-service office in Walnut Creek, contributing to a slight increase in occupancy and equipment.

And now I'll hand it back to James for closing remarks. James?

Thank you, Heather. During the quarter, we opened our ninth full-service office in Walnut Creek in response to the demand for our services in the San Francisco Bay Area. Our presence in the San Francisco Bay Area continues to grow with 36 employees and $548.9 million in deposits as of September 30, 2025.

In addition to the new Walnut Creek office, we are pleased with the growth of our previously announced food agribusiness and diversified industry business, where clients benefit from our global trade services and exceptional treasury management tools.

Five Star Bank success serves a 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 a prudent approach to portfolio management will benefit our customers, employees, community and shareholders.

As we look to the fourth quarter of 2025, we thank our employees for their outstanding commitment to ensuring Five Star Bank remains a safe, trusted and steadfast banking partner. We are confident in the company's resilience and demonstrated ability to adapt to changing economic conditions while remaining focused on the future and execution of our long-term strategy. The beneficiaries of our focused business approach are our clients, employees and community. We believe that if we support these constituents well, our shareholders will realize the benefits.

We appreciate your time today. This concludes today's presentation. Now we will be happy to take questions you might have.

[Operator Instructions] Our first question today is from David Feaster with Raymond James.

I wanted to start on the deposit front. I mean, perhaps in my mind, perhaps the core deposit growth that you saw was one of the most impressive parts about the quarter. You decreased wholesale funding. Just kind of curious where you're having the most success driving core deposit growth and how you think about that opportunity to continue to optimize the funding base a bit as you do that?

Well, certainly, third quarter, David, was exceptional. And it was -- a lot of things went our way in terms of new clients which we're very excited about. And we saw growth across our platforms in all of our geographies. So that was very exciting. I think that to replicate that type of quarter, again, David, it's going to be pretty difficult when we say that. But we were pretty happy about where we ended up.

Now our deposit pipeline, just like our loan pipeline, remains strong across all of our platforms and geographies. And so we don't anticipate that type of growth on a go-forward basis. We're looking for deposit growth on an absolute basis, not annualized between -- probably anywhere between 1% to 2% in the fourth quarter. So I think the third quarter was very strong. And I say that because we're still trying to deal with our broker deposits that we have. We have a long-term desire to eliminate those, and we're making progress. We made very substantial progress in the third quarter, and we'll just have to see how the fourth quarter goes. So that probably will have an impact in terms of limiting overall deposit growth to the extent that we pay any of those off and don't renew. But we are anticipating some growth but not to the same extent that we saw in the third quarter on the deposit side.

Okay. But -- and the reason for that is just the continued optimization of the deposit base. Because you're still going to be driving core deposits. I just want to make sure that I'm understanding that right, still driving core deposit growth, but using that to paydown broker?

Yes. [indiscernible]. Go ahead.

Yes. Perfect. And then maybe switching gears to the loan side. I mean originations were strong, the pipeline is still robust. But payoffs and paydowns are still a pretty material headwind. I think it's the second highest level that -- as far as I can see back over the past several years. I guess I wanted to first get a sense of what's driving these payoffs and paydowns? How much is it losing deals to competitors through refis or whatever asset sales or just deleveraging? And then how do you think about payoff and paydown activity going forward as rates continue to decline? Is that going to remain a pretty material headwind?

Well, in part, it's our business model with respect to our MHC and RV business, David. We anticipated being in these deals 3 to 4 years before our clients will either sell the properties or take their long-term financing to agency. And we saw a lot of that in the third quarter, and we expect that will continue to happen. Having said that, we also retained a lot of these notes that were maturing -- not necessarily maturing, but having their rates reset because we're typically -- we lend on a 5-year fixed rate basis, and it will adjust after this -- the rate -- the yield will adjust after the 60th month.

And so a lot of that is starting to come through on those originations were done particularly in '20, and we'll see some more of that in '21 -- '26 and '27 for originations in '21 and '22. So it's just really the nature of our business. There's nothing that we think is unusual about it. We recognize that we have to stay ahead of it. We've got the horses to do that. So that's why those -- we will continue to build our balances. So we're not necessarily losing deals to anybody. We like to think that we're the quickest know in town. If somebody else wants to do a deal, that's fine. But we're -- we like the model. The model is working exactly as like -- as we thought it was going to work. It's just David, fundamentally, the nature of our business and the types of credits that we make.

And that makes sense. And so with that, I mean, you talked about having the team and the horsepower to continue to outpace payoffs and paydowns. You've been really active hiring. You recently hired the Ag team. I guess, first, I wanted to just get an update on -- as you think about growth, where are you seeing the growth opportunities today? Kind of an update on the ag team, what they're seeing? And are there any other segments like that, that you might be interested in expanding into organically and hire or lift out a team? Just kind of curious what you're seeing on that front?

Yes. Let's just talk about the ag team. We booked some good credits. We're anticipating booking some very large credits in the fourth quarter, very active in the market. We're excited where that business is going. The credits and the relationships are quite substantial. To call them granular would be a complete misnomer. And when we -- when we board them, they do move the needle because they're larger deals, both on the deposit side and on the loan side. But we like where we're doing that.

We're making some penetration in markets. People know -- are beginning to know that we're serious and we're excited about where we stand in that. And the sales cycle in that business is, it can't be long sometimes over 2 years, 2 or 3 seasons. So we're very committed to it, number one.

We continue to see growth in our MHC and RV business. And where we continue to add core clients in the space. And our clients are still -- our existing clients are still buying parks and so we're excited about where that business is going.

And our storage business seems to be very strong also. RV, MHC storage is really a national platform and we're doing business across the United States. In fact, Heather, we filed what tax returns in 27 different states?

We do. That's correct.

So we have nexus in all these states. So it's truly geographically diversified. So David, we expect to see continued growth in that particular segment. From a geographic perspective, our Bay Area loan pipeline remains very strong, and that's made up of C&I and also CRE lending. We've done a lot of student housing deals in the Berkeley area, and we will continue to look for opportunities there. So that's strong.

Our Construction Industries group continues to perform well and that's primarily a deposit play. So we're excited where that business is going. Our faith-based business is having a good year, a very good year. We expect that to continue to grow. Our nonprofit business is very robust, particularly in the Bay Area. So we like where that's going. And then, of course, our government book and which, David, we focus on small districts -- small special districts, if you will. And we've seen a lot of success in that space. And again, that's primarily deposit driven.

So across the platform, we seem to be -- and geographies, our verticals and our geographies seem to be performing very well and their prospects are strong.

The next question is from Woody Lay with KBW.

Wanted to start -- I wanted to start on the net interest margin outlook. If I just look at your balance sheet, it would seem that you are set up pretty well for a down rate environment. So how should we think -- based on the most recent cut and the expectation for additional cuts from here, how should we think about the earnings power there?

Well, we think it's pretty good. We recognize we have a near-term liability sensitive, and that could -- 125 basis point cut, Heather, over a quarter would mean what?

About $850,000 of improvement.

So we see some expansion in our margin that's potential in the fourth quarter, 1 to 3 basis points, pretty consistent with what we've seen in the second or the third quarter. Maybe we can do a little bit better than that, but that's kind of what our sense of it is right now. We continue to see loan repricing in our loan portfolio. Sooner or later, we're going to run out of that as those -- all those loans reset. But near term, it looks pretty decent for us. So we see continued margin expansion with these rate cuts.

You could tell, Woody, that our cost of funds is noticeably higher than our peers, and that's because we do pay up for deposits. In a downgrade environment, that's going to be our benefit -- to our benefit, not only in our money market book, but also in our government book and some extent in our wholesale CD book. So we like the way that our balance sheet is constructed in a slight down rate environment.

Yes. Yes, it definitely seems like a benefit. To the extent we get these additional rate cuts, get the NIM benefit, do you think it drives positive operating leverage? Or does it give an opportunity to keep reinvesting in some of the -- in the Bay Area expansion market in some of these new business lines? How do you think about the toggle there?

Well, we've been pretty active in terms of bringing on very talented yet high-priced bankers. And we -- our plans on a go-forward basis -- right now, we're -- Heather, we've got 41 biz dev people right now?

Yes.

We're going to have a new one join us next week. So we're going to continue to look for opportunities to get talent. Because it's out there, it's still out there, maybe not out there to the same extent as it was 2 years or even a year ago. But we like to think we've got this balance between earnings growth and reinvesting back into our business. It's -- the toggle is not one way or the other. We like to think we can do both.

We recognize that if we didn't continue to invest, our earnings would probably be bigger, larger, but we're playing the long game here in terms of growing the growing the franchise and taking advantage of opportunities as we see them when they come up. We've always been opportunistic, and I don't see us changing that way of doing business.

No, that's really helpful. And then just last for me. Can you just remind me longer term how you think about the loan-to-deposit ratio? I mean, it's down from 104% last year. There's some broker deposit remix opportunities. So could you just remind us sort of where you aim to target that longer term?

Well, I think that we're comfortable at 95%. That's kind of a line that we all look at every month with our Board. And that's a good target for us. Sometimes it might be higher, sometimes might be less. I don't know how far less. But if there is a bias, it'd probably be higher. But we do target 95%, is something where we're comfortable at. Running -- you can run hot at 100 -- north of 100. But that's nothing that we think that we'd want to do year in and year out.

Congrats on the good quarter.

The next question is from Andrew Terrell with Stephens.

Maybe, Heather, I wanted to go back to some of the margin really quick. I think -- did you say $850,000 positive pickup for each 25 basis point cut, was that right?

Yes. For the full quarter, though, because it will take some time for our wholesale book to reprice. So it will take a full quarter to see full effect, yes.

[indiscernible]

200 for immediate repricing net.

Yes. I guess I'm just trying to think through the -- you mentioned margin of 1% to 3% in the fourth quarter, 850,000 is 7, 8 basis points of margin. We'll get the full quarter of the September cut in the fourth quarter and then it looks like in October and maybe a December cut as well that -- I feel like the margin should be up more than 1 to 3 basis points. So I guess I'm trying to ask what are maybe some of the puts and takes to the margin in the fourth quarter that could limit what it feels like it should be a decent bias higher?

So I'm going to weigh in on that, so you don't mind, Heather. So Andrew, in our government deposit book, it's driven by LAIF, local area investment fund rates, and those change every month. So you really don't see an impact of a Fed move until 90 days. You probably get the whole impact at the end of the -- that quarter or those 90 days. On our -- so that's a lagging index, okay? This is why we came up with what our sense of the margin improvement might be.

Then on our wholesale CD book, which is around $0.5 billion, those usually are 90-day resets. So you're not going to see the impact of that -- until the full impact, but quarterly impact, if you will, for 90 days. But they're all kind of -- they're not all maturing at the same time. So that impact kind of rolls in during the quarter. So the number -- or the guidance that we gave you -- that Heather gave you is really like a clean, okay, what happens at this cut, maybe a quarter down the road, what's the impact going to be. Does that make sense?

Yes, I understand. So just -- it's based on the maturity of the deposits and once you kind of fully get those through, that would get to the $850,000.

Correct. Yes, sir.

Got it. Do you have, [indiscernible], just the spot interest-bearing deposit costs at [ $930 millon ]?

Yes. That was [ $240 million ].

Okay, $240 million total. Got you. And then -- on the Page 22 disclosure around the adjustable rate repricing, I appreciate you guys adding that in there. Just the $363 million of adjustables that come up in 2026, they're at a 4.35% rate today. If those were to reprice in today's rate environment, where would the new yields be at? I'm just trying to gauge that repricing benefit to the margin, James, that we've talked about? It seems like it'd be a pretty decent tailwind.

Yes. It's probably around $180 to $200 over that. So it's really -- our spreads are usually $2.75 to $3.25 in the quarter. So you look at the 5-year today, it's 3 and -- what was it $350?

$361.

$361 and add that on top of it. That's kind of where I think it would end up. There's a pretty decent pickup -- pretty decent pickup.

Okay. And then last one for me. James, we're seeing quite an acceleration in M&A, maybe not as much in California as in other geographies. But you've got -- it's a pretty strong currency now with the stock prices trading. Just talk about your views on M&A. And I know you've obviously got a very healthy organic growth engine, probably not press for M&A, but just talk about your views on the landscape right now.

Well, it was a pretty active Monday, I'll say that much, with first foundation trading. They have some operations up and around us. And then the big deal when Cadence sold out. So those are -- I go to these conferences, Andrew, and I know these CEOs, and so they're -- they made a decision to sell. So from an M&A perspective, where we sit, we've grown, I don't know, $600 million so far this year, Andrew. That used to be a size of a bank in California. And I think the average size in California is probably $1 billion now, right?

But so we've been pretty -- we don't need to buy anybody per se. And there are -- there could be opportunities that are out there, and we always want to be able to take advantage of something that comes up. And is it -- we lean organic, most definitely. We lean organic. And as we continue to grow and develop, we become especially where our valuation is right now, the more fit, more able acquirer.

So there's nothing on the horizon for us right now. We're going into our planning session here in November. And certainly, this is always a topic of conversation. So where we sit on it is that we could be -- we could do something, but it have to be just a great deal for us and very opportunistic and deal with something that we feel like we need maybe to a little help on. And if we need a little help with anything, it's probably on our -- the granularity on our deposit side.

But -- and then a lower cost of funds, if you will, somebody who's got a lot of noninterest-bearing deposits. But we're doing fine there. We're seeing very solid growth in that particular line item in our liabilities. So I'm all over the map on this response, but we're really driving what we're doing right now organically. But like you never -- and none of our Board wants to roll out an M&A deal. But that's kind of where we -- that's where we sit.

Yes. Great. I appreciate the color. And high bar, growing $600 million this year. Great work.

[Operator Instructions] The next question is from Gary Tenner with D.A. Davidson.

I had another question just on the -- as you were going through some of the deposit buckets and so forth. Just on the money market book, what type of beta were you able to push through when we had the September cut? And what are your expectations, I guess, for cut this week?

Yes. When we did that, we were about 30% beta.

Overall.

Yes, overall. And then 25% [indiscernible].

So we'll tell you, Gary, so we're going to take any deposit relationship that's -- that is outside of our CD book that's priced 225 basis points and higher, we're going to take -- on that day, we're going to take 100% cut on those deposits. And that equates to around...

$1.4 billion.

$1.4 billion. Certain type of accounts like high-yield money market accounts are going to have 100% beta. But overall, it's...

About 30%.

About 30%.

Okay. But like, for instance, in that money market book then about 75% beta, I guess, effectively. Because most of that $1.4 billion of higher non-CDs would be in that book, right?

Yes, sir.

Okay. Okay. Great. And then just on the topic of expansion and hiring, are you seeing it becoming more competitive and more challenging to recruit? Are there more banks in your footprint following that playbook now? I mean we're seeing it in other regions of the country where like every bank in the Southeast is on these massive recruiting strategies. Are you seeing that pick up and become more competitive for you?

Yes, we are. And so it all depends on what -- whose platform is out there recruiting. A lot of the folks that we compete against don't have our performance don't have our reputation in the marketplace. So we think we've got a competitive edge there when we do go up against people and folks and for bringing on experienced bankers. So we think if we really want somebody, we'll be able to get them, but it is more competitive, most certainly. There are options. And if people are looking to grow, and if they can pick up a team, it seems like more folks are doing it.

Now having said that, these bankers, and this is a phenomenon that is not unique to California are very expensive. And especially with folks that have been through a process for the last 2, 3 years that have banks that either have been taken over -- excuse me, failed or taken over or just struggling in terms of trying to rationalize the investments they're making in these folks here in California.

And so we see some opportunity coming out of that space. But what's happened is that these bankers have been bid up. So you have to be very careful of how much you want to pay, and you have to rationalize what are they going to be able to do for you? And so those are the equations or the economics that we go through when we're thinking about picking up a team. But to answer your basic question, the answer is yes. It is more competitive.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you. It is with deep appreciation and gratitude that we have advocated for our clients and champion the communities we serve. We always will. As our expansion in the San Francisco Bay Area continues and as we build upon a legacy of superior community banking in the capital region and North State, we answer the call of businesses and organizations who desire a time-honored banking partner.

Five Star Bancorp is here to stay. We are proud to have experienced another quarter of significant organic growth built upon a sturdy foundation of client service, expanded relationships and products and the loyalty of our exceptional clients. We will always remember that we exist because of our clients trust us and we believe in them. It is our privilege to continue as 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 January to discuss earnings for the fourth quarter of 2025. Have a great day, and thank you for listening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.