Five Star Bancorp Common Stock 2026 Q3 Earnings Call

Please go ahead. Thank you for joining us to review Five Star Bancorp's financial results for the third 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. Q3 2026 was another quarter of solid execution for Five Star Bancorp, highlighted by continued balance sheet growth, net interest margin expansion, strong profitability, and the successful completion of our underwritten public offering. Net income increased to $21.9 million from $19.4 million in the second quarter of 2026. Basic earnings per share rose to $0.92, despite an 11% increase in weighted average basic common shares outstanding following our underwritten public offering in July. Loans held for investment grew by $184.5 million during the quarter, or approximately 16% annualized.

Growth was driven primarily by commercial real estate lending activity and continued production from our commercial banking teams. Deposits grew by $25.1 million, while non-wholesale deposits increased by $75.1 million, reflecting continued improvement in our funding mix. During the quarter, Five Star Bancorp completed an underwritten public offering, providing approximately $130 million of net proceeds after deducting underwriting discounts, commissions, and offering expenses. The offering was completed to support general corporate purposes, continued growth, including through the investments in the bank to pursue growth opportunities and for working capital. We believe the offering enhanced our capacity to pursue strategic opportunities while maintaining our conservative approach to capital management. As expected, the 11% increase in weighted average basic shares outstanding from the offering had a modest dilutive effect on return on average equity and earnings per share for the quarter.

The issuance meaningfully strengthened our capital position, improving our common equity Tier 1 capital ratio to 12.52% at September 30, 2026, an increase of 255 basis points over the prior quarter. We continued executing on our statewide organic expansion strategy during the quarter with the opening of our newest full-service branch in Lodi, strengthening our presence to support the agricultural and business communities in the Central Valley. We also expanded our presence in Southern California and the San Francisco Bay Area through the opening of our Calabasas administrative office and the addition of four experienced banking professionals in Palo Alto during the quarter. Our business development officer team increased from 45 to 50 during the quarter, enhancing our ability to deepen existing relationships and drive future loan and deposit growth. Financial highlights during Q3 2026 include net income of $21.9 million, up 13% from the prior quarter.

Pre-tax pre-provision income of $32 million, up 13% from the prior quarter. Return on average assets of 155 basis points compared to 149 basis points in Q2 2026. Return on average equity of 15.04% compared to 16.67% in Q2 2026. Net interest margin of 3.69%, an increase of six basis points from the prior quarter. Average loan yield of 6.14%, an increase of six basis points from the prior quarter. Average cost of total deposits of 2.19%, an increase of three basis points from the prior quarter. The efficiency ratio of 39.13% compared to 40.91% in the prior quarter, and book value per share of $25.15, a 14% increase from the prior quarter. Our Q3 results were driven by robust balance sheet growth. Loans held for investment grew by $184.5 million or approximately 16% on an annual basis, reaching $4.7 billion at September 30, 2026.

Total deposits grew by $25.1 million during the quarter. More importantly, non-wholesale deposits increased $75.1 million, more than offsetting a planned reduction in wholesale funding and further improving our deposit mix. Non-wholesale deposits accounts constituted approximately 96% of total deposits at quarter end. We also maintained a strong liquidity position, ending the quarter with approximately $2.5 billion in available liquidity. Our asset quality remained strong. Non-performing loans decreased to 0.28% of total loans at September 30, 2026, from 0.30% at June 30, 2026. Consistent with the prior quarter, the non-performing loan balance related primarily to a single Community Reinvestment Act related credit that was originally downgraded during 2025 and placed on non-accrual status during the second quarter of 2026. As of September 30, 2026, the outstanding balance was $11.4 million, and the loan remains well secured by collateral with an appraised value that meaningfully exceeds its carrying amount.

We continue to view this relationship as an isolated credit issue rather than an indication of a broader portfolio weakness. Credit trends across the remainder of the portfolio remain stable and generally consistent with our expectations. Our commercial real estate portfolio continues to benefit from conservative underwriting with a weighted average loan-to-value of approximately 56%, providing significant collateral support across the portfolio. We recorded a $2.5 million provision for credit losses during the quarter, primarily related to loan growth and changes resulting from our annual CECL model refresh. The public offering during the quarter drove meaningful improvement across all capital ratios. Our common equity Tier 1 capital ratio increased to 12.52%, our Tier 1 leverage ratio increased to 11.21%, and our total risk-based capital ratio increased to 15%.

Total shareholders' equity increased to approximately $617 million at quarter end, providing flexibility to support continued balance sheet growth and strategic expansion opportunities. The bank continues to exceed all regulatory standards required to be considered well-capitalized. We remain committed to delivering value to our shareholders. In Q3, we paid a cash dividend of $0.25 per share and declared an additional $0.25 per share dividend, expected to be paid in November 2026. Total assets increased by $182 million during the quarter, driven primarily by strong loan growth. Commercial real estate loans increased $81.8 million, while consumer loans increased by $50.9 million. Year-over-year, total assets grew from $4.6 billion to $5.6 billion, demonstrating continued momentum across our markets. Cash and cash equivalents stood at $679.5 million at September 30, 2026, representing 14.08% of total deposits.

Total liquidity consisting of cash and cash equivalents, as well as unused and immediately available borrowing capacity was approximately $2.5 billion as of September 30, 2026, compared to $2.3 billion at June 30, 2026. Insured and collateralized deposits increased to 68% of total deposits at quarter end, while net uninsured and uncollateralized deposits declined, further strengthening our funding profile. The current environment marked by evolving trade and fiscal policy, geopolitical uncertainty, and continued interest rate variability requires careful balance sheet management. We believe we are well-positioned to navigate this backdrop. Approximately 73% of our loans held for investment are adjustable or floating rate, providing meaningful responsiveness to rate movements. Combined with our strong liquidity position and conservative underwriting standards, we believe our balance sheet is structured to perform across a range of economic conditions as we move into Q4.

While economic and policy uncertainty remains elevated, client activity continues to be constructive and our pipelines remain healthy. We believe our balance sheet liquidity profile and capital position leave us well-positioned to pursue growth opportunities while maintaining our disciplined approach to risk management as we move into the fourth quarter. Our prudent underwriting standards, comprehensive loan monitoring, and focus on relationship-driven lending have contributed to maintaining a strong credit quality. Our allowance for credit losses totaled $49.4 million at September 30, 2026, reflecting continued loan growth and our disciplined approach to reserve management. The allowance as a percentage of loans held for investment was 1.05% at September 30, 2026. We continue to believe our reserve levels are appropriate given the composition of the portfolio, current credit performance, and the broader economic environment.

The increase in total liabilities during the quarter was a result of growth of non-interest-bearing deposits reflecting inflows from new accounts and existing client relationships. Total non-wholesale deposits increased by $75.1 million, while wholesale deposits decreased by $50 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 25.1% of total deposits at September 30, 2026, reflecting the strength of our commercial banking relationships. Our deposit franchise continues to be built on long-term client relationships. Approximately 62% of our deposit relationships exceed $5 million, with an average tenure of approximately 7 years. We believe this long-tenured client base supports the stability and durability of our deposit franchise and contributes to the strength of our funding profile across economic cycles. With that, I will turn it over to Heather to walk through the results of operations.