Thursday, April 6, 2023

The other week we had a post exploring the disclosures that banks make about their deposit amounts — disclosures that will be important for financial analysts in weeks to come as banks start to submit their Q1 2023 filings.

Today let’s take a deeper dive into exactly what banks are saying, courtesy of some filings that arrived within the last few days.

Example No. 1 is Western Alliance Bancorp. ($WAL), which filed a preliminary earnings release on Thursday to, as the bank itself said, “clarify deposit levels” as of March 31. Western Alliance had $53.6 billion in deposits as of Dec. 31, 2022. Then, quoting directly from the preliminary release…

  • The bank experienced elevated net deposit outflows surrounding the announcements of the Silicon Valley Bank and Signature Bank closures in mid-March, concentrated primarily in our Technology and Innovation and Settlement Services groups, with net outflows falling sharply and returning to normalized levels by March 17.
  • Since March 20, deposit balances stabilized and grew approximately $900 million to quarter end.
  • Since March 31, quarter-to-date deposit growth has continued this trajectory and increased an additional $1.2 billion as of April 4.

In other words, Western Alliance felt the tug of the black hole created by the implosion of Silicon Valley Bank and Signature Bank in mid-March; but managed to evade disaster.

Still, Western Alliance ended March 31 with $47.6 billion in deposits, a decline of 11.2 percent from the previous quarter.

But What About Insured Deposits?

That’s a good question, because let’s remember that it was SVB’s uninsured deposits that caused so much panic. The greater a bank’s uninsured deposits (that is, deposits above the $250,000 threshold set by federal banking regulators), the more panicky those depositors might become.

Western Alliance included one more bullet point in its preliminary release, saying that insured deposits at the end of Q1 were 68 percent of total deposits. Well, 68 percent of $47.6 billion is $32.37 billion. That would be the amount of insured deposits at Western Alliance.

Now go back to Western Alliance’s 10-K, filed on Feb. 23. On Page 51, in the Management Discussion & Analysis, the bank says that it had $29.5 billion in uninsured deposits on Dec. 31, 2022. See Figure 1, below; important part highlighted in blue.

Now do the math. If Western Alliance had $53.6 billion in total deposits at the end of 2022, and $29.5 billion of that sum were uninsured deposits, then the other $24.1 billion had to be the amount of insured deposits.

And if Western Alliance now has $32.37 billion in insured deposits (as indicated in this week’s release), then Western Alliance gained $8.27 billion in insured deposits during Q1 2023, even while total deposits declined.

This could have happened as large Western Alliance depositors saw what happened at SVB and said, “Oh crap, I gotta get my deposits under the $250,000 insurance limit. Lemme transfer some of my cash to other accounts.” That would have the practical effect of lowering Western Alliance’s total deposits, while more of the remaining cash qualified as insured deposits.

The lesson here is that analysts should be looking at the footnotes as Q1 filings arrive, to trace the flows of total deposits, insured deposits, and uninsured deposits.

If a bank has a high percentage of uninsured deposits, then investors should be looking to see whether the bank has similar exposure to unrealized losses on held-to-maturity securities (the assets that poisoned SVB’s balance sheet) — and if so, what steps the bank is taking to hedge such risks.

We should also note that Western Alliance is not the only one sending up smoke signals about Q1. For example, Axios Financial ($AX) also published a preliminary earnings release this week, promptly disclosing that total deposits increased by 25 percent in the quarter and 90 percent of deposits are insured.

The message from Axios is clear: “We don’t have an SVB problem!” Something tells us Axios won’t be the only bank trying to convey that point in coming weeks.

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