Cross River Bank's brokered deposits surpass $4B as FDIC proposes new rules

Fort Lee, NJ-based Cross River Bank posted $4.15 billion in brokered deposits as of the end of the second quarter, topping the list of brokered deposit balances among 58 banking-as-a-service providers, according to an analysis by S&P Global Market Intelligence.

Other sponsor banks of fintech companies — Celtic Bank Corp., Medallion Financial Corp., WebBank and First Carolina Bank — also had more than $1 billion in brokered deposit balances at the end of the quarter.

Cross River Bank, with $8.82 billion in total assets as of June 30, saw the largest growth in brokered deposit balances among the banking-as-a-service (BaaS) banks, with a $229.5 million increase quarter over quarter. The bank's brokered deposits made up 53.1% of its total liabilities at the end of the quarter.

The Bancorp Bank NA, of similar size, with $8.13 billion in assets as of June 30, kept the proportion of brokered deposits in the single digits at 6.1%. The Sioux Falls, SD-based unit of The Bancorp Inc., known for issuing cards on behalf of fintech companies, reduced brokered deposits by $110.2 million in the second quarter compared to the first quarter, as overall deposits grew sequentially by over $200 million.

BaaS providers may see significant changes in their deposit composition if a new regulatory proposal regarding the classification of deposits as brokered versus core takes effect as currently written. The Federal Deposit Insurance Corp. is accepting comments on the proposal until Oct. 22.

Under the current classification methods, a BaaS bank can consider deposits originating from a fintech program as core instead of brokered if the program partners with only one bank. However, this classification approach, based on an exemption referred to as the "exclusive deposit placement arrangement," will no longer be permitted under the new rule. The new proposal has drawn widespread criticism from the banking industry.

The new brokered deposit proposal will largely reverse a 2020 rulemaking, which took effect in April 2021. Right after the 2020 rule became effective, BaaS banks' brokered deposit balances plummeted by 42.5% in the first half of 2021 compared to the second half of 2020, in part because of changes in the classification method. The balances remained steady throughout the first half of 2022, as the banking sector flourished with liquidity thanks to the government stimulus.

Brokered deposits are often perceived as "hot money" with higher flight risk, although there is no regulatory requirement that caps the usage of brokered deposits as a funding source. Examiners typically assess a bank's reliance on brokered deposits based on the individual risk profile of each bank.

In the second quarter, some banks chose brokered deposits as their preferred source of funding, with Salt Lake City-based Medallion Bank and in-state peers WebBank and Celtic Bank having brokered deposits accounting for over 70% of total liabilities.

Medallion Bank, a subsidiary of Medallion Financial, has brokered deposits that make up 95.2% of its total liabilities. Medallion Bank has no brick-and-mortar branches and does not offer checking or savings accounts. Instead, it relies on certificates of deposit. This deposit model reduces the risk of traditional bank runs, according to its website. On the lending side, Medallion Bank specializes in recreational vehicles, boats and home improvements, and also supports consumer lending programs offered by fintech companies.

Meanwhile, some banks, including Sutton Bank, The Bancorp Bank, Evolve Bank & Trust and First Internet Bank of Indiana chose to pay off brokered deposits in the second quarter.

First Internet Bank of Indiana, the bank unit of First Internet Bancorp, paid down $139 million of brokered deposits, citing strong deposit growth through the first half of 2024. First Internet Bank of Indiana currently classifies a portion of deposits from fintech partners as brokered deposits, CFO Kenneth Lovik said during an earnings call in July. The company's overall fintech deposits grew by 34% from the first quarter and totaled $375 million on June 30, Lovik noted.

Among the banks that significantly reduced brokered deposit balances in the second quarter were Sutton Bank and Evolve Bank & Trust, both of which faced severe enforcement actions from their regulators this year.