KBRA Financial Intelligence

Banks’ Cost of Funding Moves Higher

Welcome to the May edition of KFI Insights! This month’s newsletter highlights: • Cost of funding at the biggest banks jumps • Fed research finds 22 bank runs in March 2023 • Recent M&A including credit union acquisitions of banks The Federal Reserve’s aggressive interest rate hikes are still moving through the U.S. financial system. Banks have reported higher costs of funding since the Fed started raising rates in March 2022, though the pace of increases has slowed, according to data compiled by KBRA Financial Intelligence (KFI). The largest banks, those with at least $100 billion in assets, have reported the biggest jump in cost of funds, or interest expense from deposits and other borrowings to average total funds. Costs at the biggest banks, which rely more on market funding than their smaller peers, have climbed 287 basis points (bps) to 3.09% in Q1 over the last two years. At regional banks (assets between $10 billion to $100 billion) and community lenders (assets below $10 billion), funding costs have climbed 235 bps to 2.54% and 176 bps to 2.06%, respectively. KFI Pro subscribers can locate a bank’s cost of total funding by using KCALLTDEPC in the Screener tool or in Excel.

Washington Federal Sells Multifamily Loans to Bank of America

Washington Federal Bank (KFI Score: B) agreed to sell a portfolio of about 2,000 commercial multifamily loans with an unpaid balance of $3.2 billion to Bank of America (KFI Score: B) for $2.9 billion, according to a May 14 regulatory filing.

Fed Identified 22 Bank Runs in March 2023

Researchers at the New York Federal Reserve identified 22 bank runs over six days in March 2023, according to a May 20 report. The banks saw net liquidity outflows exceed 5 standard deviations of historical withdrawals.

Banks with more uninsured deposits and higher unrealized losses on held-to-maturity securities were more likely to see deposits pulled. The runs were driven by large institutional depositors, rather than retail ones, according to the Fed. And four of the banks were not public. Banks that survived a run did so by borrowing new funds and then raising deposit rates—not by selling liquid securities.

ICBA’s Best-Performing Banks Rely on KFI Scores

Independent Community Bankers of America (ICBA) recently published its list of top performing banks of 2024. A lender must have a KFI Score of C or higher to be considered for ranking. See the full list of banks here.

Bank Holdco Scores Released

Bank Holdco Scores rose in 1Q, with increases (40) surpassing declines (20). KFI users can track score moves by using the Insight tool on the home page.

In Case You Missed It

• Bank KFI Scores fell in 1Q 2024, with declines (505) outpacing increases (353). Of the banks that had their score lowered, nonperforming assets (NPA) climbed 58 basis points (bps) to 1.39%, while return on average assets (ROAA) fell 16 bps to 0.76%.

• Loan growth slid in 1Q for the biggest quarterly drop in three years. Delinquencies in other nonfarm, nonresidential loans continue to tick up.

• The KFI search function now provides additional details to help users quickly identify specific entities, including asset size, institution type, location, and operating status.

Recent M&A

SouthState Acquires Texas-Based Independent Bank

SouthState Corp. (KFI Score: B), the $45 billion lender in Florida, agreed to buy Independent Bank Group (KFI Score: B-) for $2 billion to expand in Texas and Colorado, according to a May 20 press release. The merger, which is expected to close in 2025, will create a $65 billion asset lender.

California Banks Announce Mergers

• CBC Bancorp, the Irvine-based holding company for Commercial Bank of California (KFI Score: B) agreed to purchase Oakland-based Community Bank of the Bay (KFI Score: B+) for $14 a share in an all-cash deal, according to a May 20 press release. The merger will create a $3.5 billion asset bank in a transaction that is expected to close later this year or early 2025.

• West Coast Community Bancorp, holding company of Santa Cruz County Bank (KFI Score: B+), agreed to buy Salinas-based 1St Capital Bancorp (KFI Score: B) for $63 million in stock, according to a May 20 press release. The merger, which is expected to close in the fourth quarter, will create an almost $3 billion lender.

Washington Credit Union Acquires Security State Bank

Gesa Credit Union (KFI Score: B+), a $5.5 billion lender based in Richland, Washington, agreed to buy substantially all assets and liabilities of in-state Security State Bank (KFI Score: A) in a transaction expected to close next year, according to a May 23 press release.

Arizona Credit Union Buys Instate Bank

Pima Federal Credit Union (KFI Score: A-), the $1.2 billion lender in Tucson, Arizona, agreed to buy substantially all of $280 million-asset Republic Bank of Arizona (KFI Score: B) and its holding company for about $22 a share in an all-cash transaction, according to a May 16 press release. The acquisition is expected to close in the second half of the year.

United to Buy Piedmont Bank

United Bankshares, (KFI Score: B) a $30 billion asset lender in Charleston, West Virgina, agreed to acquire Piedmont Bank (KFI Score: B+), which has $2.1 billion in assets and is based outside of Atlanta, according to a May 10 press release. The deal is expected to close by the beginning of next year.

Van Hesser’s 3 Things in Credit

Follow KBRA’s weekly podcast and newsletter 3 Things in Credit, hosted by our Chief Strategist, Van Hesser. From the May 24 episode:

To be clear, there are a lot of puts and takes in the inflation/higher rates discussion that lies in front of us. This won’t affect markets today, but I’ll bet we’ll have a much better view of this a year from now, post the election.