The first quarter will not be easily forgotten, given two of the biggest-ever bank failures and the ensuing panic that engulfed several other regional banks.
We knew heading into March that balance sheets, specifically deposits and unrealized losses from securities, would be worth tracking during earnings season. The collapse of Silicon Valley Bank and Signature Bank (and issues that eventually took down First Republic Bank) highlighted the importance of balance sheet management.
We reviewed a number of quarterly reports from publicly traded banks and identified some key topics.
The Battle for Deposits Is Real
While several regional banks reported double-digit year-over-year decreases in deposits, most emphasized on quarterly calls that their situations had stabilized. Many other banks lost deposits to money market funds and other higher-rate products.
The results did not include deposits to the new Apple Savings account, which debuted in April. Early reports indicated that the tech giant lured nearly $1 billion in new deposits in the offering's first week.
To be sure, many community banks were able to hold the line and, in several instances, increase deposits. But the costs are going up as more money leaves noninterest-bearing accounts to go to CDs.
And this isn't just a bank issue.
“We’re still hearing the need for deposits from many credit unions,” said Cynthia Schroeder, a strategic advisor for credit union clients at Sievewright & Associates, an SRM Company. “CD specials are helping but there’s interest in finding new ways to bring in deposits.”
Rebalancing the Balance Sheet
Many people wondered how many banks would look to sell underwater securities and accept a short-term hit in exchange for improved liquidity or investment in better-performing assets.
A few did, with most making it clear they sold their securities before the implosion of Silicon Valley Bank. Eastern Bankshares in Boston reported a $194 million net loss after it sold $1.9 billion of securities at a $280 million loss. Net proceeds were used to increase cash levels. Community Bank System in Syracuse, N.Y.; First Interstate BancSystem in Billings, Mont.; FVCBankcorp in Fairfax, Va.; and Atlantic Union Bankshares in Richmond, Va., were other examples of restructuring balance sheets in the first quarter.
Josh Herman, a risk management expert at SRM, predicted we'd see "some upticks in borrowing positions, given strained liquidity and concerns around bank failures." Quite a few banks made use of the Federal Home Loan Bank system, and at least 19 tapped into the Fed's Bank Term Funding Program. Many others highlighted their ability to borrow, if needed, but clarified that they had yet to do so.
Generally, most banks held onto their securities, perhaps waiting for the next turn in the rate cycle so they could regain value. The unanswered question is how long that will take.
Watching Commercial Real Estate
Since the pandemic's earliest days, people have wondered when credit cracks would appear in the CRE space. Jeff Ostheimer, SRM's director of fintech advisory services, notes that nearly 2,000 banks have CRE exposure exceeding 200% of total capital. More than 900 have ratios above 300%, with over a third of those topping 400%.
"I'm concerned about the mortgage and CRE market," Jeff added. "As loans come up for renewal, many won't be able to afford the new loan."
Hotels and retail properties seemed to have stabilized, but office space remains a concern that many bankers follow closely. The office sector "continues to show signs of weakness," Michael Santomassimo, Wells Fargo's CFO, noted during the San Francisco company's earnings call. "We'll continue to closely monitor this portfolio, but as has been the case in prior cycles, this will likely play out over an extended period of time."
M&T Bank is also watching the office sector, CFO Darren King said during the Buffalo, N.Y., company's earnings call. Criticized loans in the office portfolio are "up slightly but not dramatically," King added, noting that about half to two-thirds of the $120 million loan-loss provision in the first quarter was tied to CRE.
The Bottom Line
Publicly traded banks comprise a small percentage of the financial institutions that SRM tracks. We'll know more about the industry and parallel credit union trends as government-collected data flows in.
For now, the overall system has proven to be relatively resilient despite high-profile failures and concerns among some depositors and investors. There will be some heartburn in the coming months, but most banks seem to be finding ways to weather the storm.
We will continue to monitor developments over the year and keep you informed as trends in balance sheet management and credit quality that merit added scrutiny.