FIVE STAR BANCORP (FSBC) stock intrinsic value fair value estimate & owner earnings analysis

Five Star Bancorp owns Five Star Bank, a commercial bank that began operating in December 1999 and is based in Rancho Cordova, California. It has nine branches: Roseville, Natomas, Rancho Cordova, Redding, Elk Grove, Chico, Yuba City, San Francisco and Walnut Creek, the last opened in September 2025. It gathers business, municipal and relationship deposits in Northern California and lends them out, mostly as commercial real estate loans, which were 83% of loans at December 2025. The largest niches are manufactured home communities ($1.03 billion, 31% of commercial real estate) and RV parks ($413 million, 12%). Much of this lending reaches beyond California: only about 57% of real estate loans are secured by California property. The bank has no goodwill, so book value and tangible book value are the same: $20.87 a share at December 2025 and $22.14 at June 2026. It runs very lean, with a 2025 efficiency ratio of 41%, and that low cost base is the main reason it earns high returns. How we measured earnings. We start from operating cash flow, remove swings in loans held for sale and other working-capital items, and subtract stock pay. For loan losses we charge the losses the bank actually wrote off each year, net of recoveries, rather than the accounting provision. The provision also includes reserves set aside for loans that have not gone bad, and from 2022 to 2025 more than half of this bank's provisions went into building that reserve as the loan book grew. Net write-offs were $1.6 million in 2022, $3.2 million in 2023, $4.1 million in 2024 and $3.1 million in 2025, about 0.08% of loans last year. The risk that losses rise from here is carried in the cases below, not ignored. We also charge the yearly amortization of the bank's low-income housing tax credit investments as a real cost. The bank pays cash up front for these partnerships to earn tax credits, and the credits already lower its tax bill, so counting the tax saving without the cost would overstate earnings. In 2025 the bank also bought $6.6 million of transferable tax credits and used them against that year's taxes; we treated that purchase as a tax payment, not as a cost on top of taxes. Five Star was an S corporation until its May 2021 IPO, so for 2020 and 2021 we restated taxes at the full 29.56% corporate rate. On this basis owner earnings per share were $3.27 (2020, pro forma), $2.19 (2021), $2.92 (2022), $2.74 (2023), $2.39 (2024) and $3.16 (2025). 2024 was held down by rising deposit costs and by a stock offering that raised the average share count about 18%. Our starting level is $2.83 a share, the median of 2022 to 2025. We left out 2020 and 2021 because of the S-corporation years and the pandemic small-business loan program. That $2.83 was earned on an average book value of roughly $16 a share. On average equity, owner earnings returned between 14.1% (2024) and 20.6% (2022), with a median of about 16.8%. First-half 2026 net income was $38.0 million, or $1.78 a share, up 38% from a year earlier, a pace of roughly 16.5% a year on equity. Owner earnings per share grew 32% in 2025. The first year of our base case earns about $3.43 a share, 9% above 2025, so it sits well below that trailing growth rate. How a bank's value works. A growing bank cannot pay out everything it earns. At its current capital level it keeps about 8.8 cents of equity for every dollar of assets: $474 million of equity against $5.38 billion of assets at June 2026. So in every case we count only the cash left after setting aside the equity needed to fund the growth that case assumes. Base case, about $79 a share. The bank earns 15.5% on equity. That is below its 2022 to 2025 median and its first-half 2026 pace, for two reasons. Capital is now higher than in 2022 and 2023, which lowers the return. And we assume loan write-offs run at roughly twice the 2023 to 2025 pace: the bank's own reserve of 1.09% of loans at December 2025 anticipates more losses than it has recently realized. Balance sheet growth starts at 12% and slows by one point a year to 3% in year ten. That is below its track record: assets grew 11% to 17% a year from 2023 to 2025, deposits grew from $1.78 billion in 2020 to $4.20 billion in 2025, and assets rose another 13% in the first half of 2026 alone. Book value per share roughly doubles to about $45 over ten years. After that we assume no growth and full payout at 14% on equity, the bottom of the 2022 to 2025 range, since nothing we can point to guarantees above-median returns indefinitely. The long tail rests on a franchise operating since 1999, deposit relationships above $5 million that have stayed an average of about 7.7 years, and a structurally low cost base, not on any assumed growth. Bear case, about $34 a share. This case is built from three risks the bank itself discloses. First, commercial real estate loans were 594% of risk-based capital at December 2025, up from 572% a year earlier. That is about twice the 300% level at which bank regulators expect heightened risk management, and it is weighted to manufactured housing and RV parks. Second, the 53 deposit relationships of more than $10 million each held $2.0 billion, or 48% of deposits, including $790 million from municipalities. Third, margins are sensitive to deposit costs, as 2024 showed. In this case the first year looks like 2024, with a 12.5% return and growth slowing to 5%. Then a commercial real estate downturn over roughly three years starting in 2027 produces write-offs totaling 3% of loans, about $145 million before tax, peaking at 1.5% of loans in the middle year. That year is a small loss. Growth stops while large depositors are replaced with costlier funding. Regulators then require more capital, lifting equity from 8.8% to 10.5% of assets over three years. After that the bank grows 2% a year to year ten and earns 9% on equity for good. Bull case, about $107 a share. The bank earns 17.5% on equity, matching 2023 and its first-half 2026 pace, with write-offs staying near their recent level. Growth starts at 15% and slows to 6% by year ten, still below the pace of the past five years. After that, growth stops and the bank earns 15.5% on equity with full payout. In all three cases the bank carries on as a going concern, so we did not subtract its deposits, borrowings or its $74 million of subordinated notes. These are the bank's raw material, and the risks of leverage are carried in the bear case. The cases are far apart because most of a bank's value depends on whether today's returns persist, and this bank is concentrated in both its loans and its deposits. Our earlier estimate charged the full yearly loan-loss provision against earnings. We now charge the losses actually written off and carry the risk of higher future losses in each case directly. This raises the earnings history modestly, but the values move little, because each case already set its return on equity with credit costs in mind. What would make this analysis wrong: losses on manufactured home community or RV park loans far above anything in the bank's history, the loss of several large deposit relationships at once, or a regulator forcing the bank to shrink its commercial real estate concentration. Any of these would push results toward the bear case. The margin-of-safety price of $40 is about 1.8 times June 2026 book value and about 12 times first-year base-case owner earnings. It sits roughly 18% above the bear case, which we judge the right cushion for a leveraged, concentrated lender. From that price, the base case implies roughly a 20% annual return.