Bankers think that the ripple effect created by the failure of Silicon Valley Bank in March and Signature Bank in April has been largely contained. However, seven of Greater Philadelphia’s 10 largest community and regional banks saw a decline in their total deposits in the first quarter.
Fear of the two failed banks, which were joined by San Francisco's First Republic Bank last week, encouraged depositors to transfer their money from smaller banks to larger banks that they perceived as safer. Only Meridian Bank (3,4%), OceanFirst Bank (3,2%) and Fulton Bank (1,9%) saw increases in their deposits during the first quarter in the Philadelphia area. Parke Bank, Republic Bank, Bank of Princeton, First Bank, Customers Bank, Univest Bank, WSFS Bank, and Bank of Princeton all experienced declines.
Parke, which is based in Sewell, New Jersey, explained its $112.2million decrease in total deposits in its earnings release. It attributed the drop to a decline in non-interest-demand deposits of $75.4million, a reduction in savings account deposits by $35.9million, and a reduction in money market deposits by $9.8million.
Chris Marinac is the director of research for Janney Montgomery Scott. He said that when evaluating the decrease in deposits during the quarter, it's important to look at the whole picture. He said that the bank deposits increased 40% from the end of 2019 until spring 2022 when they reached their peak due to the stimulus money. Since then, deposits have declined by over 5% from that peak. He said that there was fear the March crisis could cause deposits to fall by 10% to 20%. This did not occur, and deposits only fell modestly.
Marinac stated, 'So far we are still net ahead [compared to 2019].
Marinac stated that the cost of deposit rates increased by a significant amount over the last quarter, and are now catching up with the Fed Funds rate which has been rising in the recent past. He stated that banks had been slow to increase deposit rates up until now. This is especially true since Silicon Valley and Signature failed. He said this heightened the urgency for banks to change, and he anticipates the trend to continue into the second quarter.
The key to the industry is to have a mixture of deposits that are skewed toward those core accounts. You are their trusted adviser, you handle payroll and you're the account for the company. We see the business as catching up with where it should be in terms of pricing.
Marinac stated that community and regional banks are still very profitable and have a high credit rating. He thinks Greater Philadelphia's local bank are well-positioned 'because I think we will have a little air pocket with this deposit pricing issue and margin issue. But the profits of banks will be pretty much intact. I believe that as we move into the economic climate of the next six, twelve months, the banking industry will have many safety valves.
While there has been some noise about bank failures, the core metrics of local banks remain strong.
Marinac stated that there was a great deal of misinformation in March. Failures and intense struggle were confined to banks that had a specific business mix focused on cryptocurrency and Venture Capital such as Silicon Valley Signature First Republic and other West Coast institutions. Marinac described the Philadelphia-area banks as mundane, but in a positive way. They are community banks that serve local businesses.
They don't deal with large, lumpy deposits like Silicon Valley. Marinac stated that if they had connections to the New York Market, these were few and far between. They tend to stay local, especially in Philadelphia, Delaware, and South Jersey. It seems that the banks were temporarily affected by the questions during that middle of March week, but that things settled down once March ended. These banks were losing some of their deposits because everyone had [pandemic aid] funds.
Marinac stated that due to pandemic stimuli programs, there were a large number of deposits in the years 2020 and 2021. These deposits, however, have been slowly leaving the local banks over the last few quarters as interest rates increased.
Marinac stated that in some ways the crisis involving Silicon Valley and Signature, which occurred in March, was a positive experience for these banks. The bank executives spent considerable time in contacting their customers to reassure them that they were safe. They saw an opportunity to take advantage of the turmoil at struggling banks and snag customers.
I think their proactive nature worked to their advantage. Marinac stated that the deposit run, which was discussed on television and social media, was not at all bad and, in some cases, did not actually happen. There was a lot confusion and chatter for a few days and that brought us here.
Marinac stated that a strong bank like Souderton Univest had experienced margin compression as well as an increase in funding costs. He said that the company would still make money, and be able to handle any credit issues if the economic situation worsens. However, Janney Montgomery Scott believes that credit quality won't deteriorate if there is a recession.
Marinac stated that 'in the Philly area, they do not have the same level of leverage provided to their customers'. Their customers are getting a smaller loan relative to the value of their property than they did 15 years ago. The industry as a whole is more conservative. This lower leverage is important, because the banks are better protected if there's a recession. This doesn't mean they won't make money, but it means they should lose less on an individual property.
Marinac, looking into his crystal ball, said that he believed banks would tighten up on credit with higher interest rates, collateral requirements and ask for a smaller loan to value.