April 30, 2024 - FSBC
Five Star Bancorp: Is a "Run" on the Bank Actually...Good News?
Five Star Bancorp (NASDAQ: FSBC), a regional bank headquartered in Rancho Cordova, California, recently released its Q1 2024 earnings transcript. While analysts are focusing on the continued margin compression, a more interesting story is unfolding beneath the surface. This story, revealed within the transcript, is the significant decrease in deposits, a substantial $71.1 million or 2.35% compared to the previous quarter.
Declining Deposits: A Cause for Concern?
A decline in deposits can often signal trouble for a bank. However, Five Star's management team attributes the decrease to a deliberate strategy of reducing reliance on volatile and expensive "wholesale" deposits, such as broker deposits and public time deposits. Instead, the bank is focusing on building a more stable funding base by attracting and retaining "non-wholesale" deposits from loyal, long-term customers.
Shifting Deposit Mix
The following table shows the change in Five Star's deposit mix between Q4 2023 and Q1 2024:
| Deposit Type | Q4 2023 ($ millions) | Q1 2024 ($ millions) | Change ($ millions) |
|---|---|---|---|
| Wholesale Deposits | 360.0 | 177.0 | -183.0 |
| Non-Wholesale Deposits | 2,643.1 | 2,755.1 | 112.0 |
| Total Deposits | 3,003.1 | 2,932.1 | -71.0 |
Source: Five Star Bancorp Q1 2024 Earnings Call Transcript
Building a Foundation of Loyalty
This shift in deposit mix highlights Five Star's focus on cultivating long-term customer relationships. The transcript reveals that a significant portion of their deposit base comes from customers with deep ties to the bank. Notably:
- Deposit relationships exceeding $5 million constitute 58% of their total deposits.
- The average age of these relationships is nine years.
- Local agency depositors, known for their stability, make up 24% of their deposit base.
The Cost Advantage of Loyal Customers
The transcript suggests that Five Star's emphasis on loyal customers is leading to a lower cost of funds compared to the wholesale deposits they have shed. While the exact cost of new, non-wholesale deposits wasn't provided, the average cost of all deposits for the quarter was 2.53 basis points. Further analysis is needed to compare the cost of new deposits to the cost of departing wholesale funds.
Loan Growth and Future Outlook
Five Star reported loan growth of $22.4 million in Q1 2024, primarily driven by consumer lending. This, combined with a strong pipeline, suggests the bank is deploying its newly acquired, lower-cost deposits into profitable lending opportunities.
Conclusion
Five Star Bancorp's Q1 2024 earnings transcript tells a story that goes beyond the headline numbers. While the deposit decline might initially raise concerns, a closer look reveals a bank proactively strengthening its foundation. By reducing reliance on volatile wholesale funding and focusing on building lasting customer relationships, Five Star may be positioning itself for greater long-term profitability. This strategic "run" away from volatile deposits could be the best news for investors seeking stability and steady growth.
"Fun Fact: In 2022, Five Star Bancorp was awarded the Raymond James Community Bankers Cup, recognizing its commitment to social responsibility and local impact. This community-centric approach likely plays a role in fostering strong customer relationships and reinforces the bank's position as a trusted partner."
