How community banks focused on reliability, reassurance in wake of industry chaos

A month ago, Tom Iadanza, president at Valley Bank, was just catching his breath from a weekend-long mad sprint.

The news just broke about now-familiar banking sector struggles. Within three or four days, his bank contacted — and not through email or any automatic system, but instead virtual or face-to-face meetings with bank leaders, including Iadanza himself — around 75% of its commercial customers.

“Beginning March 9th, when Silicon Valley Bank went the way it went — similar to when we entered the COVID-19 (pandemic) — our first reaction was, we have to get in front of our customers, let’s tell our story,” he said. “We can’t disappear. We have to be visible.”

Valley, one of the largest commercial banks based in the state, raced to convey to customers its side of the story, something many banks have felt necessary to prevent further issues related to runaway deposit withdrawals. Here’s what its argument, and that of other banks, boils down to: The circumstances are different at these ailing banks than theirs.

Banking industry commentators tend to back that assessment. And, while that means they have confidence no domino trail leads to well-established banks in the New Jersey market, there’s also still some anxiety from industry experts about the potential for future bank runs — whether based on truly concerning bank predicaments or not — in an era of fast-moving information.

Mike Affuso. (File photo)

Mike Affuso, CEO of the banking trade group New Jersey Bankers Association, likens the influx of customer withdrawals that unraveled Silicon Valley Bank, reportedly sparked by Twitter and private chat groups, as like “yelling ‘fire’ in a crowded room.”

It’s partly for that reason that the resemblances to the pervasive industry troubles of the 2008 banking crash are slim, according to Affuso.

“I don’t think anyone in New Jersey has a model that looks anything like Silicon Valley or Signature (banks),” he said. “Still, you have to reassure customers of that. And I know that our CEOs have spent long hours doing that.”

For Valley, Iadanza said, it, for the most part, was successful in every conversation it had with clients.

The concern it had to alleviate is that the devaluation of long-duration Treasury investments as the Federal Reserve raised interest rates — the experience of a bank such as Silicon Valley Bank, which had to sell those securities at a significant loss to answer a sudden mass withdrawal of deposits — paralleled what was going on in its own bank’s portfolio.

“We have a much more granular portfolio of deposits, with about 75% being insured deposits, and a flatter investment strategy with easy access to liquidity,” Iadanza said. “Most of our deposits are tied up in loans. And we have strong credit quality and a very conservative history of underwriting. Combine that with 95 years of being in business and never having a losing quarter, that differentiates what we believe Valley is from those particular banks.”

Here’s what he’s pointing to as evidence the outreach did the job: Valley’s deposit base held up incredibly well, he said.

In fact, over about six weeks, the bank opened up more commercial deposit accounts than it does normally in a year. It was the recipient of a number of accounts that came over from Signature and Silicon Valley banks.

Iadanza isn’t inclined to celebrate.

“I can’t say this has been a good thing for any bank,” he said. “It just creates havoc for everyone in the industry.”

It’s a headwind for the industry, bankers agree — especially when paired with the prospect of a recession in the near-term.

Patrick Ryan. (File photo)

Patrick Ryan, CEO and president at First Bank, conveyed that it’s both a challenge as well as an opportunity for community banks to prove out their oft-touted trustworthiness to their customers.

Ryan added that the idea that most — if not all — New Jersey community banks have a different, safer model hasn’t been a tough sell to their customers.

“As far as the fundamentals go for the industry, it was the case of a couple outliers — not the case of a couple canaries in the coalmine,” he said. “But, any time there’s a crisis of confidence in the industry, people send up red flags. … Just because it was the expectation that we were different from the guys getting into trouble, and that their money wasn’t at risk, doesn’t mean they didn’t want to hear it from us themselves.”

If there’s any lasting change that Ryan predicts for his sector, it’s a heightened caution about the startup and tech venture loans, as well as the cryptocurrency divisions that reportedly contributed to the falls of Silicon Valley Bank and Signature Bank, respectively.

Don Musso. (FinPro)

With these banks having those niche focuses and large investments that went belly-up, the risk assessment and management of these banks has come into focus. But Don Musso, founder and CEO of FinPro, a New Jersey management consulting firm focused on banking, said he doesn’t buy the narrative that this was a risk breakdown on the part of these bank boards.

“If you looked at them on traditional risk measures, they looked fine,” he said. “The fact is, up until this, everyone in the world believed non-interest-bearing checking accounts were the best funding source known to mankind. They were stable. … And both of these banks had a lot of those accounts.”

For that reason, he added, there weren’t major demands to scrutinize the share of uninsured deposits they held. Any trouble they got into was expected to take some time to unfold — and allow for self-correction in the meantime, the thinking went.

But it didn’t take much time at all, Musso said. Silicon Valley Bank had $42 billion run out the door in deposits in a day — and $100 billion in transfer requests came through that night.

Bidding for SVB

A Wayne-based bank buying Silicon Valley Bank after its headline failure was very nearly a headline itself.

Tom Iadanza, president at Valley Bank, said that his institution, as had been reported publicly, was one of the about 20 financial groups submitting a bid to the Federal Deposit Insurance Corp., or FDIC, after it took control of Silicon Valley Bank’s assets.

Groups were allowed to put in bids about two weeks after news first broke regarding the bank’s collapse. Valley was in the running up until the end of the FDIC’s bidding process, but, eventually, North Carolina-based First Citizens was named as the buyer.

“It was a hectic time,” Iadanza said. “We were piecing together all the due diligence and negotiating. Regulators had to approve anyone that bid. And we were very quickly approved to be a bidder.”

Iadanza, however, is limited in what he can say about the local bank’s involvement in that government-mediated transaction. Valley is under nondisclosure agreements from the FDIC.

“I’ll say this: It would’ve been a good outcome for (our) organization and the government in being able to place the bank with another strong bank,” he said.

“What happened here is you had your very first digital run ever,” he said. “In a matter of four hours, about 20 to 25% of (Silicon Valley Bank’s) deposits were withdrawn. There’s no bank that can withstand that kind of liquidity run.”

The takeaway message for Musso is that banks have to tread carefully in today’s social media-dominated world. If one community’s sphere of influence expresses that a bank is unsafe, money is going to be moved in a matter of minutes, he said.

He expects the Federal Reserve’s FedNow Service, a soon-to-be-released system aimed to help financial institutions deliver faster end-to-end payment services, could exacerbate that.

“These (bank) runs today are all going to be quick, and really hard,” he said. “It’s all going to make managing liquidity very difficult.”

For now, however, Musso believes that, while there are still analytics and customer education going on behind the scenes, the banking sector is starting to show signs of a needed reprieve.

“I do think that the contagion of failures has been contained now,” he said.

Certainly for Iadanza and Valley National Bank, they have some sense that normalcy is gradually being restored after several weeks of long days and nights making outreach for the purposes of customer preservation.

“Still, we’re all very focused on the direction of the bank and making sure our people and customers are informed about what’s happening,” he said.