KBRA Affirms Ratings for Five Star Bancorp

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Rancho Cordova, CA-based Five Star Bancorp (NASDAQ: FSBC) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for Five Star Bank, the main subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by FSBC’s solid earnings profile underpinned by an above average NIM, a low-cost expense base, and a history of low credit costs. The company’s margin benefits from a comparatively high loan-to-earning asset mix, generally in the high-80% range, combined with robust organic loan growth (20% YoY). Importantly, this growth has been primarily funded through strong core deposit generation, enabling management to reduce more expensive wholesale funding sources. As a result, the cost of deposits declined 30 bps to 2.16% in 2Q26, while average loan yields remained largely stable, contributing to 10 bps of NIM expansion over the past year to 3.63%. Management expects profitability to remain solid as continued loan production and the runoff of higher-cost wholesale funding provide further support to the margin. That said, FSBC remains heavily spread-reliant, with less stable sources of fee income, such as loan-related fees and venture fund investment income, accounting for only 4% of total revenue. Nevertheless, the company’s branch-lite operating model has resulted in a structurally low expense base, with operating expenses representing just 1.51% of average assets. While FSBC is primarily funded through core deposits, the deposit base remains concentrated, with the top 62 relationships (each accounting for >$10 million) representing approximately 49% of total deposits. This concentration is mitigated by the generally long-tenured nature of these relationships, which include sizable public agency, nonprofit, and commercial operating accounts, as well as substantial contingent liquidity. Management continues to prioritize core deposit generation, which has recently outpaced loan growth and contributed to an improvement in the loan-to-deposit ratio to 94% at 2Q26.

The company maintains an elevated investor CRE concentration at 599% of risk-based capital. However, this is mitigated by conservative underwriting standards, portfolio diversification, and a consistently strong credit track record. Manufactured housing community (MHC) loans comprise approximately 30% of the CRE portfolio and have historically exhibited countercyclical characteristics, generally outperforming other CRE segments during periods of economic stress. Across the broader CRE portfolio, underwriting remains conservative, supported by low loan-to-value ratios, strong debt service coverage metrics, and disciplined credit administration. As a result, asset quality has consistently outperformed peers, with NPA and NCO ratios averaging just 0.04% and 0.08%, respectively, over the past five years. Taken together with solid reserve coverage, strong earnings generation, and adequate capital, FSBC appears well positioned to absorb a reasonable level of potential credit losses. FSBC’s regulatory capital ratios have generally tracked below peer averages due to its sustained pace of organic loan growth, with a CET1 ratio of 10.0% at 2Q26. However, management has historically demonstrated willingness to access to the capital markets to support its growth strategy and targets maintaining a consolidated CET1 ratio within a 10%-11% range. Most recently, the company announced an approximately $114 million common equity offering to support continued balance sheet growth and general corporate purposes. Management continues to target maintaining a consolidated CET1 ratio within a 10%-11% range. While this target remains modestly below similarly rated peers, KBRA views current capital levels as appropriate given the company’s conservative underwriting, strong earnings generation, favorable long-term credit performance, and demonstrated willingness to proactively raise capital in support of growth.

Rating Sensitivities

Continued geographic expansion and growth resulting in improved scale, coupled with sustained earnings and credit outperformance, capital levels commensurate with the higher-rated category, and a more diversified deposit base with improved deposit granularity, may result in positive rating action over time. A rating downgrade is not expected, however maintenance of capital ratios, specifically CET1, well below peer levels, or significant deterioration in credit quality resulting in elevated credit costs that materially impair earnings over multiple quarters, could pressure the ratings.

To access ratings and relevant documents, click here.

Methodology