KBRA Financial Intelligence

Q2 2023 Brokered Deposits Jump

Banks are turning to brokered deposits to shore up liquidity as higher interest rates erode the value of their securities portfolios.

Brokered deposits jumped about 18% in Q2 2023 and have almost doubled from the year-earlier period, according to call report data compiled by KBRA Financial Intelligence (KFI). The rise in brokered deposits comes as overall deposits continue to fall. Depositors withdrew about $98.6 billion in the second quarter after pulling $472 billion in Q1, the most on record going back to 1984, according to the FDIC.

The highest interest rates in two decades have saddled lenders with billions in unrealized losses. The Federal Reserve, which has increased interest rates more than 500 basis points (bps) since March 2022, is signaling that it may raise them further to curb stubborn inflation. Additional hikes will leave banks with more unrealized losses.

Banks are adding more expensive brokered deposits to bolster their liquidity rather than selling underwater securities, according to Rick Childs, a partner at Crowe LLP. The rapid rise in rates has made asset liability management especially challenging. "It’s a heck of a balancing act right now," said Childs.

Certain banks–from the smallest to some of the largest–have added meaningfully to their brokered deposit tally. Evolve Bank & Trust, a $1.5 billion asset bank outside Memphis (KFI Score: C-), had about $445 million in brokered deposits in Q2, which is 35% of total deposits – up from 2% in the previous year.

KFI identified banks that reported more than 10% in brokered deposits to total deposits in Q2 and those lenders that also increased brokered deposits by more than 10% year over year. KFI’s analysis lists the top 30 banks by asset subcategories where applicable.

Banks making it on the list include:

• City National Bank (KFI Score: B, ~$95 billion in assets) increased its brokered deposits to 11% of total deposits from virtually zero from the previous year.

• First Foundation Bank (KFI Score: B, ~$12.8 billion in assets) increased its brokered deposits to 20% of total deposits from about 1% from the previous year.

• Ohio State Bank (KFI Score: B, ~$425 million in assets) increased brokered deposits to 23% of total deposits from less than 1% from the previous year

KFI Pro subscribers can examine the year-over-year growth of brokered deposits across the entire universe of more than 4,000 banks. -- With Anela Kobilic and Medhavi Jain

Recent M&A Transactions

Credit unions announced five bank deals during the week of August 28, bringing the total number of transactions this year to 10, according to data compiled by KFI.

Michigan State University Federal Credit Union agreed on August 28 to buy substantially all of McHenry Savings Bank. The East Lansing, Michigan-based credit union also announced on August 31 it plans to purchase virtually all assets and liabilities of Algonquin State Bank. Both banks are in Illinois.

Five Star Credit Union in Dothan, Alabama, also announced two bank deals on the same days. The $773 million asset credit union agreed on August 28 to buy Macon, Georgia-based OneSouth Bank as a purchase and assumption transaction. Five Star also announced plans on August 31 to purchase Abbeville, Georgia-based Wilcox County State Bank ($178 million in assets).

Innovations Financial Credit Union ($400 million in assets) agreed on August 29 to buy First National Bank Northwest Florida to create a $570 million lender with eight branch locations.

Michael Bell, an attorney at Honigman who advises credit unions on such transactions, said he expects "elevated activity" for the remainder of the year, though not at the five-a-week pace.

ICYMI: Q2 2023 Bank Snapshot

KBRA Financial Intelligence (KFI) released a peer snapshot for the top 30 banks by asset category for Q2 2023. The peer analysis examines lenders across five financial metrics—ROAA, NPA, Tier 1 risk-based capital, uninsured leverage, and HTM/total securities—as a percentile by four asset subcategories from the largest lenders to community banks.

3 Things in Credit

Follow KBRA’s Chief Strategist, Van Hesser, and his 3 Things in Credit podcast. From the September 15 episode:

"End of the hiking cycle – We’re kind of there. OK, the August CPI report might have leaned a touch toward the warm side of things, and markets are now suggesting a 50/50 prospect of one more 25 bps hike this year (in either the September/November/December FOMC meetings).In any event, the last hike is in sight."