Five Star Reverses Margin Squeeze as Loans Slow

The Tip Desk · November 10, 2026 · 4 min read

Net interest income rose 10.51% to $50.9 million in the third quarter as the net interest margin recovered six basis points to 3.69%.

Five Star Bancorp (FSBC), a California holding company operating through Five Star Bank, reported net interest income of $50.9 million for the three months ended September 30, 2026, up $4.8 million, or 10.51%, from the second quarter, reversing a seven-basis-point net interest margin decline the company had recorded in the prior period.

Net interest margin expanded six basis points to 3.69% from 3.63% in the second quarter. The company said the recovery reflected growth in higher-yielding loans and a higher yield on interest-earning assets, partially offset by higher deposit funding costs. Average interest-earning assets rose $376.7 million, or 7.39%, to $5.48 billion. The average yield on those assets increased five basis points to 5.74%, including a six-basis-point rise in the average loan yield to 6.14%. Average loans increased $284.3 million, or 6.57%, to $4.61 billion. Interest expense rose $2.0 million. Average deposits increased $257.9 million, or 5.55%, and the average cost of deposits rose three basis points. Average non-interest-bearing deposits increased $48.1 million, or 4.13%.

Year over year, net interest income increased $11.6 million, or 29.42%, from $39.3 million in the third quarter of 2025. The company attributed that lift to balance-sheet growth and lower deposit funding costs following three Federal Reserve rate cuts that began in September 2025, partially offset by lower yields on interest-earning assets. The average cost of deposits fell 25 basis points versus a year earlier, and brokered deposits declined from $216.4 million to zero. The effective federal funds rate was 3.88% at September 30, 2026, down from 4.09% a year earlier.

Period-end loans held for investment grew $184.5 million, or 4.08% (about 16% annualized), to $4.70 billion, slowing from a $306.3 million, or 7% (about 29% annualized), increase in the second quarter. Commercial real estate loans were $3.68 billion. Consumer and other loans were $425.5 million.

Total deposits increased only $25.1 million, or 0.52%, to $4.82 billion, a sharp slowdown from a $330.0 million, or 7.38%, increase in the prior quarter. Non-wholesale deposits rose $75.1 million, or 1.65%, while wholesale deposits fell $50.0 million, or 20.00%. Non-interest-bearing deposits rose $36.1 million, or 3.07%, to $1.21 billion. Interest-bearing deposits declined $10.9 million, or 0.30%, to $3.61 billion. Non-wholesale deposits constituted 95.85% of total deposits. Cash and cash equivalents were $679.5 million, or 14.08% of total deposits. Total liquidity was approximately $2.5 billion.

The company completed an underwritten public offering of 3,133,750 shares with about $130.0 million of net proceeds, lifting the common equity Tier 1 capital ratio to 12.52% from 9.97% at June 30, 2026, and shareholders’ equity to $617.2 million from $473.8 million. Weighted average basic shares outstanding rose 11.03% to 23.62 million. President and Chief Executive Officer James E. Beckwith said the offering expanded capacity for organic growth and strategic investment. The company also opened a Lodi branch, a Calabasas administrative office, and hired four people in Palo Alto. Business Development Officers increased from 45 to 50.

Net income was $21.9 million, or $0.92 a share, compared with $19.4 million, or $0.91 a share, in the second quarter. Return on average assets was 1.55% and return on average equity 15.04%. Pre-tax income was $29.5 million. The efficiency ratio improved to 39.13% from 40.91%. Non-interest expense rose $1.0 million, or 4.97%, to $20.6 million on higher salaries, benefits and recruiter fees from added headcount, partially offset by lower employee-related, advertising and operational-loss items. Non-interest income fell $0.2 million, or 9.51%, to $1.7 million on lower venture-fund earnings and loan referral income, partially offset by a special FHLB stock dividend.

The provision for credit losses increased $0.3 million, or 11.11%, to $2.5 million, reflecting loan growth and the annual CECL model refresh. The allowance was $49.4 million, or 1.05% of loans, versus 1.09% at year-end 2025. Nonperforming loans to loans held for investment decreased to 0.28% from 0.30% at June 30, 2026. Nonperforming loans were $13.3 million at September 30, 2026, after a $11.4 million Community Reinvestment Act-related credit was placed on non-accrual in the second quarter; the company said the loan remains well secured by collateral.

The board declared a $0.25 per share cash dividend, $0.05 more than dividends declared in 2025, matching the payout already in place in the second quarter. An additional $0.25 dividend declared on October 15, 2026, is expected to be paid on November 9, 2026.