U.S. banks can add the revival of student loan payments to the list of obstacles to deposit growth.
With more than 40 million Americans scheduled to resume making student loan payments this month, some consumers are tapping funds that otherwise would stay in their checking and savings accounts. Student loan payments for all Americans with such debt will total about $18 billion per month, according to a Jefferies report from this summer.
It is an unwelcome dynamic for an industry that has already seen consumer deposits flatline amid heightened competition among financial institutions. Thanks to higher interest rates, banks are also paying more for deposits — a contrast with the cheap funding that financial institutions enjoyed after the Federal Reserve cut interest rates sharply in 2020.
To prepare for the expected impact of the end of the pause on federal student loan payments, banks are modeling worst-case scenarios and bracing for a continued decline in deposits. Some are partnering with third-party vendors that promise to help bank customers with student debt reduce their monthly payments. Lower payments for consumers mean fewer deposits leaving the bank each month to pay down student debt.
“There are certainly areas of deposit pressure, and student loan payments are one more layer of pressure,” said Chris Marinac, director of research at Janney Montgomery Scott.
Other factors eating away at both consumer and commercial deposits include the rising cost of goods and services, which is leading banks’ customers to spend funds that would otherwise be deposited at the bank, as well as fierce competition from other financial institutions.
Deposits at U.S. commercial banks totaled $17.3 billion in late September, down from $17.9 billion a year ago. Bank deposits surpassed $18 billion for the first time in 2022, after consumers spent more than two years putting stimulus funds and other pandemic-era savings into their bank accounts.
“To limit deposit declines, banks have had to increase the rates they pay in the face of rising yields on products such as money market funds and Treasuries, as well as competition from other banks,” S&P analysts wrote in a report last week.
At the onset of the COVID-19 pandemic in 2020, the federal government paused student loan payments and lowered interest rates for borrowers to 0%. The moratorium was extended several times before the Biden administration announced earlier this year that payments would once again be due this fall.
As consumers adjust to resuming payments on their student loans, the relationship between household income and deposits may become more relevant for banks.
Lower-income households typically have a larger share of their assets in the form of bank deposits than their higher-income counterparts, according to research published Thursday by the Federal Reserve Bank of New York. Because households with lower incomes are more likely to have student loan debt, banks could see a particularly robust decline in deposits among those customers.
Households with the lowest incomes kept about 66% of their money in checking or savings accounts and the remaining 34% spread across other asset categories, according to the New York Fed data. At the same time, households in the highest income tier kept 17% of their money in deposit accounts, with the other 83% in stocks, bonds and investment accounts.
Several large U.S. banks have partnered with Payitoff, a startup that helps financial institutions automate debt management for consumer loans. Payitoff will help banks take advantage of existing relief programs for student loan borrowers, said Bobby Matson, the company’s CEO and founder, which can result in more of their customers’ funds remaining in deposit accounts.
“[Banks] should be really thinking about how to minimize the payments so they can reduce how many deposits are just getting allocated to these accounts,” Matson said.
Payitoff saves the average borrower with student loan debt about $240 per month, Matson said.
A clearer picture of deposit trend lines will come into view next week, when U.S. banks begin reporting their third-quarter results. Analysts expect the data to show that industry-wide deposits remained stable in the third quarter.
At Wells Fargo, commercial deposits are expected to stay at the same level, but deposits from consumers are set to decline through the end of the year, Chief Financial Officer Michael Santomassimo said at an industry conference late last month.
“The primary driver there is really spending that’s driving those deposits down,” Santomassimo said.
City National Bank, which since 2015 has been a unit of Royal Bank of Canada, reported a $38 million loss last quarter.
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It’s been a difficult year for the U.S. regional banking sector generally, but especially for Los Angeles-based City National Bank, which has been particularly hard hit by rising deposit costs.
The $96.4 billion-asset bank — long known as the “bank to the stars” because of its extensive Hollywood connections — has a larger focus on commercial and wealth management clients than other midsize banks that have also been facing deposit pressure.
As City National’s sophisticated depositors sought higher interest rates, the share of its deposits that pay interest rose from 56.3% at the end of last year to 62.1% six months later.
City National’s Toronto-based parent company, Royal Bank of Canada, is now facing pressure to cut costs substantially, particularly after the U.S.-based subsidiary reported a $38 million quarterly loss late last month.
On Thursday, City National announced an infusion of new leadership, saying that Greg Carmichael, the former CEO of Fifth Third Bancorp, will become the executive chair of its board of directors.
Carmichael will report directly to RBC Chief Executive Dave McKay, and City National CEO Kelly Coffey will in turn report to Carmichael. Coffey has been with City National since 2019, after previously serving as the chief executive officer of JPMorgan Chase’s U.S. private bank.
City National did not make Carmichael available for an interview on Thursday — he is scheduled to join the company’s board on Oct. 2 — but recent comments by RBC executives and analysts who cover the bank underscore the challenges that he will face.
Nadine Ahn, RBC’s chief financial officer, said at an industry conference this week that City National did not previously prioritize building its U.S. deposit franchise, as RBC did in Canada.
That approach became a problem after interest rates started rising last year, and in the wake of the failures of two California-based regional banks.
Ahn said that there’s now a focus on building City National’s deposit base.
“But it’s a hard slog for deposits in the U.S.,” Ahn said. “You have seen liquidity come out of the system to a greater extent than you have in Canada. And the pressure that’s putting on the ability to extend credit is quite substantial. You’re seeing banks sell off loan portfolios.”
Ebrahim Poonawala, an analyst at Bank of America Securities who covers RBC, said that City National was hurt in its most recent quarter not only by higher deposit costs, but also larger provisions for credit losses and rising expenses.
“The confluence of those three made it worse,” he said in an interview before Carmichael’s hiring was announced. RBC executives have said that they will be discussing a more ambitious expense-reduction program during the current quarter.
Nigel D’Souza, who covers RBC as an analyst for Veritas Investment Research, said that City National’s recent troubles are largely symptomatic of the broader struggles of the U.S. regional banking sector.
“City National has to offer attractive rates on its interest-bearing deposits. And that’s what’s driving higher interest costs,” D’Souza said in a recent interview. “And that’s what’s in turn putting pressure on the interest margin and hurting the top line at City National.”
He said that what began as a liquidity problem in the spring has turned into a profitability issue. “And it’s also further magnified by banks having to pull back on loan growth in order to shore up liquidity,” D’Souza said.
In 2015, RBC paid more than $5 billion to purchase City National, which had previously operated independently.
D’Souza thinks RBC should sell its Southern California-based unit and focus on banking in Canada, as well as its wealth management and capital markets divisions, all of which he described as businesses that generate higher returns on equity and carry lower risk.
But D’Souza also said that a sale appears to be unlikely, since it will be difficult for RBC to fetch a price for City National that it views as fair.
“I think you’re not going to see them exit the U.S.,” he said. “But I think you’re going to see them emphasize growth in areas other than U.S. banking.”
In a statement, an RBC spokesperson said that City National is part of the Canadian bank’s long-term growth strategy in the United States, which the spokesperson described as RBC’s “second home market.”
McKay, RBC’s chief executive officer, has also spoken recently about its commitment to City National Bank, in addition to the parent company’s U.S. wealth management and capital markets businesses.
“”The diversification of our business in the U.S. is really important. We’ve got three fantastic client franchises,” McKay said last week in remarks at the Scotiabank Financial Summit in Toronto.
He also said that RBC “still sees enormous opportunity for the City National franchise.”
To support the current strong uptick in credit growth, bank deposit rates are expected to remain at elevated levels for a few months, say experts..
The reason for this is that year-on-year (y/y) credit growth is outpacing deposit growth. As on August 25, 2023, the y/y credit and deposit growth was 19.39 per cent and 12.93 per cent, respectively, per RBI data.
So, to narrow this gap, banks may either continue with the current attractive deposit rates for a longer period or nudge them up further.
CARE Ratings, in a note, said: “It is anticipated that net interest margins will contract during the current fiscal year, primarily due to the escalation in deposit rates. Despite the Monetary Policy Committee hitting pause, banks have continued to raise interest rates on their existing loan portfolios.
“A reduced level of systemic liquidity is expected to exert upward pressure on money market rates, contributing to the containment of inflationary pressures.”
Banks’ term deposit rates of greater than one year duration rose to 6.00-7.25 per cent range as on September 1, 2023 against 5.30-6.10 per cent as on September 2, 2022, per RBI’s weekly statistical supplement.
“At this point of time, there is a war between the banks to get that slice of saving which is there in the system. Deposit rates are anyway at elevated levels. But they seem to be stabilising at the current level,” said the treasury head of a private sector bank.
Kotak Securities analysts, in a report, observed that deposit mobilisation patterns need monitoring as the competitive intensity is high, given the limited headroom available for private banks as well as the recent merger of HDFC group where the demand for deposits is high.
Banks’ aggregate cost of deposits rose to 1.78% in the second quarter, up 37 basis points from the prior quarter and more than offsetting the impact of higher rates on loan yields, according to S&P Global Market Intelligence.
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Inflation reached a 40-year high in 2022, topping 9% in the aftermath of the pandemic and the supply chain snarls it created. This set in motion a range of unique challenges for banks — from rising deposit costs to weaker loan growth to fresh threats to credit quality.
Prices have since been largely tamed — the Consumer Price Index increased at a relatively modest 3.2% rate in July — but this was due to aggressive interest rate hikes that have weighed on banks’ profitability in 2023.
The Federal Reserve has boosted rates 11 times since March 2022, driving borrowing costs higher, curbingconsumerspending and helping to curtail overall prices. However, the Fed’s actions also pushed up the interest rates that banks pay for deposits. When this happens, the margin between what banks pay for deposits and earn on loans — known as net interest margin — contracts. Shrinking margins tend to hurt banks’ bottom lines because most of them rely heavily on the income they earn from lending.
The median NIM for the U.S. banking industry fell to 3.40% in the second quarter, down 5 basis points from the prior quarter and down 20 basis points from the start of the year, according to S&P Global Market Intelligence data. The firm said banks’ aggregate cost of deposits rose to 1.78% in the second quarter, up 37 basis points from the prior quarter and more than offsetting the impact of higher rates on loan yields.
“No question in a high-rate environment, the pressure on margins becomes a challenge,” said Robert Bolton, president of bank investor Iron Bay Capital.
When NIMs dwindle, banks tend to scale back lending. They do this to reduce their need for high-cost deposits to fund loans and to minimize exposure to sectors vulnerable to an economic downturn. Historically, when spiking rates combine with inflation, the U.S. economy goes into a downturn. When lending slows, so does banks’ collective revenue.
For example, Optimum Bank in Fort Lauderdale, Florida, is methodically easing back on lending this year after strong growth in 2022. It still expects to expand this year, but investors should expect a noticeably slower pace, Moishe Gubin, chairman of the $622 million-asset bank, told shareholders in a second-quarter letter.
“I, for one, am in favor of slowing growth during this strange time in the world with interest rates being as high as they are,” Gubin said.
As Gubin suggested, lenders also grow more selective to avoid recession fallout — namely, souring loans and the losses that accompany them. In the current market, bankers are concerned about commercial real estate broadly and urban office properties in particular, given enduring remote-work trends and high vacancy rates.
With recession concerns, an increasing number of lenders boosted reserves for potential future loan losses during the first half of 2023.
Several community banks that cater to local businesses also said during second-quarter earnings season they were closely monitoring those customers’ ability to absorb both higher expenses imposed by inflation and increased borrowing costs.
Citizens Financial Group said its index of national business conditions worsened in the second quarter. It dipped to 48.5 from 53.9 the prior quarter. A reading below 50 indicates weakness.
Eric Merlis, managing director at Citizens, said that while the overall labor market remained strong in the second quarter, new business applications decreased in most states and manufacturing activity slowed. The Citizens index results show “a business environment where activity has slowed as interest rate hikes seem to be working to curb inflation,” Merlis said.
Bankers also are tempering fee-income expectations because of anticipated pullbacks in consumer spending and card use — on top of an already sharp drop in residential mortgage demand after interest rates spiked. Banks earn fees on home loan originations.
Against that backdrop, many banks are looking for ways to become more efficient to offset high deposit costs and falling revenue should lending recede in an economic downturn. Several have closed branches and laid off staff this year.
“I do think you see some urgency to rein in expenses,” said Michael Jamesson, a principal at the bank consulting firm Jamesson Associates.
KeyCorp is struggling to regain investors’ confidence, as the Cleveland-based lender underperforms other regional banks, its profits drop and the size of its dividend comes into question.
The company’s stock is down 38% this year, a larger drop than other regional banks its size, including Ohio-based competitors Fifth Third Bancorp and Huntington Bancshares. The ratings agency S&P Global downgraded KeyCorp last week, citing its “constrained profitability” compared with other banks its size.
The $195 billion-asset bank’s troubles center around the rapid rise in interest rates over the past year. A sizable chunk of Key’s assets are tied up in securities that the company bought when interest rates were lower — saddling it with lower-yielding assets for several more months and limiting its interest-related revenues.
Key’s interest expenses are climbing, too. The bank is paying more for its deposits — part of the industrywide competition to retain depositors by offering higher interest rates. Higher-cost borrowings that Key assumed this year in larger volumes than its peers are also weighing on the company.
As a result, Key’s guidance on its net interest income — what it earns in interest minus what it pays in interest — has proven to be a disappointment.
“It’s been a very tough year for them,” said Gerard Cassidy, an analyst at RBC Capital Markets, adding that Key’s balance sheet “was not set up for this kind of rate environment.”
KeyBank’s parent company projects that its net interest income will drop 12% to 14% this year — a sharp swing from its projection in April of a 1% to 3% drop, and from earlier forecasts that net interest income would rise. Its noninterest income has also slumped, partly due to a decline in investment banking activity. Overall, Key’s quarterly profits haven’t been this low in years, except for a couple of quarters at the start of the pandemic in 2020.
There is a light at the end of the tunnel, but it may take at least a year to get there. As some of Key’s lower-yielding assets expire, cash will be freed up, and the company should be able to reinvest those funds at higher interest rates.
Key executives have pointed to that coming shift as a factor that will benefit the company — to the tune of $900 million annualized by the first quarter of 2025.
That number is “not immaterial,” Cassidy said. But it’s “tough for shareholders to be patient considering the stock has suffered so much this year,” he added.
Some analysts are particularly pessimistic about Key’s prospects. Alexander Yokum, an analyst at CFRA Research, downgraded the company from a “sell” rating to a “strong sell.”
Key offers a healthy dividend to investors, but Yokum wrote that the dividend is “at risk of getting cut” as the bank prioritizes building up its capital to comply with still-pending rules from the Federal Reserve.
As Key’s profits fall, the amount of earnings going toward its dividend has risen sharply. The dividend payout ratio has “ballooned” to 76%, far higher than the 42% figure at its peers, Yokum wrote.
In a statement, Key said that it’s well capitalized and on strong footing — thanks to a moderate risk profile, a wide range of funding sources and “a diversified deposit base built on earned and enduring trust from our clients.”
“We are a nearly 200-year-old financial institution with safe, sound and strong fundamentals,” the company said. “KeyBank is well positioned to continue supporting all our clients with a full range of financing options while maintaining our moderate risk profile and delivering value to our shareholders.”
Asked last month about a potential dividend cut, KeyCorp CEO Chris Gorman said that he was “confident” the company could sustain the payouts. The company is clearly “under-earning” thanks to its balance sheet positioning, Gorman told analysts at the time.
But Key is also building capital and paring down its balance sheet, and executives expect the current difficulties with respect to net interest income to reverse themselves in the next couple of years, Gorman said.
Plus, Key’s loan book remains healthy, according to Gorman, who said that it should perform well even if a recession hits.
Analysts agree that credit quality is a major bright spot for Key, which in the years after the 2008 financial crisis cut back on risk-taking in its loan portfolio.
Key’s sharper focus on credit risk has led to reduced exposure to the office sector — a segment that’s drawn concern from investors as sluggish return-to-office trends spark worries that urban office loans will deteriorate.
Less than 1% of Key’s loans are office-related. At Key’s peers, that figure is a median of 3%, the company noted in an investor presentation.
Key’s credit quality “remains excellent, and its exposure to higher-risk loan categories is low,” S&P wrote in its report downgrading the bank. The ratings firm also pointed to Key’s “diversified deposit base” as a source of stability.
But S&P also noted that higher interest rates “will continue to pressure profitability for longer and to a greater degree at Key” than at its peer banks.
One reason that Key is in this predicament: its investment and hedging strategies. When interest rates were lower, the bank deployed some of its spare cash on securities.
Those securities are paying some interest, but far less than they would have if Key had either bought them at today’s rates or stuck its cash at the Fed. The central bank now pays upwards of 5.25% for the cash banks that place there — a far higher rate than the 1.74% yield that KeyCorp is earning on its available-for-sale securities.
The securities aren’t ultra-long term, so they’re starting to roll off Key’s balance sheet and opening the door for the bank to reinvest its money at higher rates. Interest rate swaps that Key bought to protect itself against changes in rates are also expiring over the next two years, which will provide yet another boost.
When Key reaches those inflection points, the company should look stronger than its peers, said Scott Siefers, an analyst at Piper Sandler. Right now, Key’s biggest challenge is convincing investors that its net interest income is “indeed finding a bottom and will regain momentum,” Siefers said.
“They’ll make it through, but this is not a thing where they wake up Monday or Tuesday and this is resolved,” Siefers said.
The bank’s securities portfolio has also soured investors for another reason — the “unrealized” losses that accumulated as its low-yielding securities lost value in a high-interest-rate world.
At the end of the second quarter, Key’s securities were worth roughly 13% less than what the bank paid for them, according to regulatory data.
The company sticks most of its investments into the “available-for-sale” accounting bucket, a strategy that some analysts say is wise because it gives Key more flexibility than classifying them as “held-to-maturity” would. If banks sell any chunk of bonds they had planned to hold to maturity, they generally need to absorb losses on the whole portfolio — a penalty that doesn’t apply to selling available-for-sale securities.
But Key is also a “bit unlucky,” given pending changes from the Fed, said CFRA’s Yokum. The regulators’ recent overhaul of rules for large and regional banks — following the failure of Silicon Valley Bank and First Republic Bank — removes a provision that allowed Key and other banks its size to opt out of quarterly swings in their capital tied to gains or losses on its bond portfolios.
Megabanks are required to factor in unrealized gains and losses on their available-for-sale securities each quarter, but regional banks are currently shielded from those quarter-by-quarter swings. The Fed’s changes will be phased in, limiting the impact of the change for Key. The end date for some of its securities is also approaching, helping soften the capital blow further since unrealized losses evaporate if securities are held until they mature.
But some investors are taking a wait-and-see approach on certain banks, and have moved to stocks they view as safer bets.
“Key has its work cut out for it, and this will be a long road,” Siefers said. But the company has a “plan in place, and now it comes down to execution,” he added.
Financial institutions are looking to upgrade their tech stacks to attract customers and drive deposit growth. The approach of strengthening deposits and adding to the client pool follows the spring collapses of Silicon Valley Bank, First Republic Bank, and Signature Bank. “Banks that had good and aggressive digital account opening experiences were able to gobble […]
Comerica CEO Curtis Farmer says the Dallas-based company would welcome the return of some of the deposits that exited the bank during this spring’s industry turmoil. “We hope over time — and seeing some signs, early signs of that — that customers will bring some of those deposits back,” he said.
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Executives at Comerica are now forecasting an even steeper decline in deposits for all of 2023, but the pace of outflows keeps slowing, and they hope that some deposits that fled might return.
Average deposits are now expected to decrease 14% to 15% compared with last year, executives said Friday during the Dallas-based company’s second-quarter earnings call. That’s steeper than the 12% to 14% decline predicted in April, and the 9% to 10% decline predicted in March.
Comerica CEO Curtis Farmer reiterated that while the company has seen an exodus of deposits — about $3.7 billion was withdrawn after the March failure of Silicon Valley Bank sparked several weeks of liquidity concerns across the industry — Comerica did not lose customers. And the crisis-induced push to put deposits into different accounts appears to be largely over, he added.
“We saw some customers diversify deposits,” Farmer said. “And we hope over time — and seeing some signs, early signs of that — that customers will bring some of those deposits back.”
The $90.4 billion-asset Comerica is one of several regional banks that experienced rapid deposit outflows this spring, especially among technology and life sciences customers who sought to diversify where they park their cash. Some other regionals, including Huntington Bancshares, Synovus Financial, M&T Bank and Fifth Third Bancorp, reported an uptick in deposits for the second quarter as the turmoil has eased.
Deposits at the company, which peaked at $82 billion during the pandemic, have been shrinking for several quarters. The events this spring accelerated the outflow, but the company, which has a large base on non-interest-bearing deposits, had been anticipating some outflow due to rising interest rates and customers’ desire to shift into interest-bearing accounts.
The company is now projecting year-end deposits to hover in the $63 billion to $64 billion range.
“I think the takeaway is that the industry has stabilized since March and there’s not this panic going on,” Christopher McGratty, an analyst at Keefe, Bruyette & Woods, said Friday in an interview. Comerica’s “deposit issue isn’t going away, but it’s not getting worse at this juncture.”
Average deposits at Comerica totaled $64.3 billion during the second quarter, down 17.1% year over year and down 5.2% compared with the first quarter of this year. The revision to the full-year guidance is a reflection of the Federal Reserve’s ongoing quantitative-tightening program that began last year and the impact of the industrywide turmoil, executives said Friday.
Non-interest-bearing deposits made up around 47% of Comerica’s total deposit base as of June 30, the company reported. That figure will probably “dip slightly” to around 44% to 45% by the end of this year, Chief Financial Officer James Herzog said during the call. The 47% includes period-end “elevated” customer balances that are expected to exit or have already moved out, he said.
Exactly how that percentage unfolds depends on several factors, including how successful Comerica is in bringing back interest-bearing deposits, Herzog said.
“And we would, of course, welcome back those interest-bearing deposits,” he added.
Like some regional banks, Comerica is tweaking its balance sheet strategy. In June, it announced that it would wind down its mortgage warehouse business, and it is being more selective in terms of loan growth, which should lift capital ratios through year-end, Herzog said.
Combined, those decisions should keep loan growth “relatively flat” for the third quarter, he said.
As for the future of deposits in technology and life sciences, which started declining last year amid a slowdown in the tech sector, Comerica has no plans to step away from that business.
The cash burn that those companies are experiencing probably isn’t over yet, but it will eventually be a case of cash-building at some point, said Peter Sefzik, Comerica’s chief banking officer.
“We’ve been in that business a long, long time,” Sefzik said. “We plan to stay in it.”
Amid strong competition for deposits, Seattle Bank’s CD Valet, which assists customers in finding the most competitive certificate of deposit rates, this month added digital account opening capabilities to the platform. “We’re providing somewhat of a software-as-a-service subscription to other FIs in the ecosystem, that allows them to use our marketplace and platform to originate […]
Corporate treasurers plan to put more cash into money market funds rather than deposits, according to a new survey that highlights the pressures banks are facing as they strive to hold onto their customers’ money.
In a survey conducted earlier this spring, 38% of treasurers said they wanted to increase their allocation of cash to money market funds that invest in U.S. government securities, which they saw as a safe place to put money while also earning some interest.
By contrast, 27% of the survey respondents said they were looking to increase their bank deposits. One in four said they were looking to reduce their bank deposits, according to the survey from the Association for Financial Professionals.
Those results could be worrying for bankers, since money market funds compete with deposits, which have declined at many institutions after the banking turmoil in March.
It’s possible that the attitudes of corporate treasurers have changed since the survey was completed. The responses were fielded between March 7, three days before Silicon Valley Bank’s failure, and March 30.
Still, the results suggest some fraying of the ties between banks and their commercial clients, which the industry has traditionally counted on as a source of stability. Some 83% of treasury professionals said their relationship with a bank was critical in picking where they placed deposits, down from 93% last year.
“When something rattles the industry, like we saw in March, they’re looking at it … with a slightly different lens,” said Tom Hunt, director of treasury services and payments at the Association for FInancial Professionals.
Relationships with banks remain important, he said, but treasurers are increasingly wondering: “Where is my risk?”
Companies are already moving more of their cash into short-term investments, primarily by buying Treasury bills or investing in money market funds that buy short-term government securities, the survey found.
Others are still keeping more cash in the banking system — either parking it at larger banks that are viewed as too big to fail or using services that offer workarounds to the Federal Deposit Insurance Corp.’s $250,000 coverage limit.
The Association for Financial Professionals received 222 responses from treasurers and those in similar positions, with 78% of them coming from companies, 13% from nonprofits and 8% from government agencies.
The survey results line up with the deposit churn that banks have been seeing, said Peter Serene, a consultant at Curinos who advises banks on commercial deposits.
Banks are competing heavily for companies’ extra cash, both with each other and with higher-yielding options such as money market funds. Even when an institution is a company’s primary bank — the place where it keeps cash for its daily payments — it may find that it can’t rely on as many funds as it once did.
“Great, you won the primary relationship. But you can’t expect to get quite as many deposits with that as you could have in the past,” Serene said.
The survey results also pointed to some frustration with banks that have sought to keep the rates they pay to commercial depositors low over the last year. As the Federal Reserve hiked short-term rates aggressively, yields on money market funds rose quickly.
The process of getting higher rates at banks is “not as transparent as corporations would like,” according to Hunt of the Association for Financial Professionals. Banks often use one-off exception pricing, and their so-called earnings credit rates can be confusing, he said.
Some corporate deposits technically don’t earn interest, but they do get credits that essentially lower the fees that companies have to pay for the services banks provide.
The survey found that transparency in how those credits work is a critical factor in 19% of treasurers’ decisions on picking a bank, up from 9% last year.
What’s more, the average rate those credits paid in April was just 0.72%, according to Curinos data, compared with more than 2% or 3% on bank corporate deposit and savings accounts, and even higher rates at money market funds. Companies are waking up and doing the math, Curinos’ Serene said.
“And they’re saying: ‘Boy, maybe I should really be changing the way I think about using my cash and use it more to earn interest and less to offset bank fees,” Serene said.
In light of the changing market, some banks are paying interest on what were once non-interest bearing deposits — raising their expenses and hampering their profitability.
Banks are a “critical juncture,” Serene said. They want to keep their rates relatively low, yet they also want to keep their credibility with clients by helping them to earn more.
“The challenge is, when you do that, it’s better for the client. It’s not as good for the bank,” Serene said. “So the bank stands to see their interest expense increase faster than it gets offset with fee income.”
Wells Fargo Chief Financial Officer Mike Santomassimo fielded criticism over stagnating consumer deposits Tuesday during Morgan Stanley’s US Financials, Payments and CRE Conference, and highlighted Wells’ digital infrastructure investment in response. “We’ve been focused at … improving our digital capabilities and you’ve seen that kind of rollout over the last year and a half,” Santomassimo […]
Northwest Bank has improved its customer acquisition and retention through personalized, automated marketing and digital offerings since implementing data-driven marketing agency Deluxe in 2021. The $14 billion bank launched Deluxe’s Life Event Trigger Program last year and posted program outperformance at 112% of the target, checking balances also outperformed at 118% of the target and […]
Piper Sandler found that 62% of the chief financial officers surveyed viewed funding costs as the biggest challenge in 2023.
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The rapidly rising cost of deposits following prominent regional bank failures was by far the most commonly cited concern for chief financial officers, according to a new report.
The failures were hastened by runs on the banks’ deposits. This intensified competition for funding across the sector and compounded already elevated upward pressure on costs amid increasing interest rates. The collapse of First Republic Bank in early May amplified competitive pressures.
Another 16% surveyed by Piper Sandler said liquidity worried them most, followed by the 15% who noted increased regulation. Only 7% cited the potential for higher loan losses as their biggest source of apprehension.
“We were quite surprised that only 7% of the CFOs indicated that their greatest concern was asset quality,” said Mark Fitzgibbon, Piper Sandler’s research director. “Given how late we are in the economic cycle and the rapid move up in interest rates, we would have expected this to account for a much higher percentage of responses.”
With the specter of recession looming large following 10 Federal Reserve rate hikes since spring 2022, the CFOs were asked if they saw early cracks in credit quality. Loan losses tend to mount during recessions, but 65% said they saw no signs of deterioration. Some 12% said they spotted some early issues in consumer lending and 10% were concerned about commercial real estate vulnerability. Another 2% cited construction loan weakness and 2% indicated that credit was beginning to deteriorate across all segments.
Fitzgibbon said that, while loan portfolios appear healthy overall, the fact that a third of finance chiefs were at least concerned about pockets of credit suggests some weakness lies ahead. “It sounds like we could see some softening” with second-quarter earnings, he said.
With the cost to fund loans rising and threats to credit quality increasing,loan growth is expected to slow throughout 2023. Piper Sandler’s survey found that 38% of CFOs indicated that they expect loan growth of 3% to 6% for 2023. Another 35% expect up to 3% growth, while 5% expect their loan portfolios to contract. Only 2% expect double-digit loan growth this year.
During the first quarter, community banks’ collective loan growth rate fell to 1.3% from 3% in the previous quarter and 3.4% in the third quarter of 2022, according to S&P Global Market Intelligence data. Growth slowed across all loan types for banks under $10 billion of assets. Executives cautioned throughout the earnings season in April that lending activity was slowing further.
Old Second Bancorp, for one, increased its first-quarter loans 3.5% from the prior quarter. But James Eccher, chairman and CEO of the $5.9 billion-asset company, said that pace of growth “is not sustainable.” He anticipates the Aurora, Illinois-based bank’s loan portfolio will expand this year, but the rate of growth could get cut in half.
“I think if you step back and look at the macro environment, there’s certainly recession fears out there,” Eccher told analysts on the bank’s first-quarter earnings call. “Our borrowers are being very cautious.”
After hosting a bank conference in May, D.A. Davidson analysts said executives who spoke at the event reported loan pipelines were “down meaningfully, given reduced demand (on account of economic uncertainty and the impact of rising rates),” as well as more conservative underwriting.
“We suspect the latter stems from the increased cost to fund that growth — and likely tighter credit standards, including a number of banks citing a higher bar for putting new CRE loans on the books,” the Davidson analysts said in a report.
A vote Thursday by the New York City Banking Commission means that KeyBank and Capital One won’t receive municipal deposits from the city for up to two years.
Bloomberg
The New York City Banking Commission voted Thursday to stop depositing city funds at Capital One Bank and KeyBank, saying that the banks failed to meet a requirement that they document their efforts to combat discrimination in lending and employment.
As a result of the 3-0 vote, Capital One and Key won’t receive new municipal deposits from New York City for up to two years. They also won’t be allowed to renew contracts or enter into new agreements with the city during the suspension.
Capital One held $7.2 million in New York City deposits across 108 accounts at the end of April, while KeyBank held $10 million across three accounts, according to a statement from the city’s banking commission following a public hearing Thursday.
The two banks “outright refused” to submit required certifications, which demonstrated a lack of effort to “root out discrimination,” the banking commission’s statement said.
A KeyBank spokesperson said Thursday that the bank provided the required information to the New York City Banking Commission.
“This is a misunderstanding and we look forward to clarifying this issue with the Banking Commission,” the spokesperson said in an email.
The KeyBank spokesperson also denied discrimination in any of the bank’s operations and said that the bank does not currently hold deposits with the City of New York.
A Capital One spokesperson said in an email that the McLean, Virginia-based lender prohibits discrimination against employees and clients, and that its submission to New York City officials was “consistent” with what it submitted in previous years.
In February, New York City tightened its rules for banks that want to receive municipal deposits. The new rules include a requirement that banks provide details about their anti-discriminatory lending and employment practices.
“Banks seeking to do business with New York City must demonstrate that they will be responsible managers of public funds and responsible actors in our communities,” Comptroller Brad Lander, who is a member of the New York City Banking Commission, said in a statement.
“KeyBank and Capital One have atrocious track records of not just under-serving but actively harming the interests of low-wealth communities and people of color,” Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition, said in a press release.
During Thursday’s meeting, Lander also voted against making three other banks — Wells Fargo, PNC Bank and International Finance Bank — eligible to receive the city’s deposits.
Lander accused those three banks of failing to prevent discrimination. But he was not joined by the two other members of the Banking Commission — Deputy Comptroller for Policy Annie Levers and Tonya Jenerette, designee to the commission for Mayor Eric Adams — and the three banks were certified to receive New York City deposits.
A Wells Fargo spokesperson said the San Francisco-based bank values its relationship with New York City. “We are ready to continue serving its needs today and well into the future,” the Wells spokesperson said in an email.
Spokespeople for PNC and International Finance Bank did not respond to requests for comment.
During Thursday’s hearing, the banking commission also voted unanimously to certify 23 other banks to receive city deposits over the next two years.
The hearing was the first time that the city allowed public comments about its designation process. Residents and activists who attended spoke out against banks that were seeking to hold municipal deposits, calling on city officials to instead establish a public bank.
Allowing public comments is a “key first step toward establishing a public bank to hold city deposits and reinvest in communities,” Andy Morrison, associate director of the New Economy Project, said during the hearing.
“We urge the commission to use the full extent of its authority to ensure that public dollars work for the public good,” Morrison said.
Other speakers criticized banks for contributing to climate change, and for providing financing for unfair housing practices.
Alice Hu, senior climate campaigner at New York Communities for Change, pointed to banks’ loans to oil companies, saying that extreme weather events due to climate change impact lower-income New Yorkers “first and worst.”
Barika Williams, executive director at the Association for the Neighborhood & Housing Development, urged city officials to apply further scrutiny in granting deposit designations to banks.
“There must be additional efforts taken to deepen community engagement,” Williams said during the hearing. “[Banks’] ability to hold and profit from New Yorkers’ hard-earned city deposits should be a privilege, not a right, and one they should be required to earn.”
Live Oak Bank in Wilmington, NC is the fourth largest state-chartered bank in North Carolina and a national leader for funding small businesses.
Zachery Eanes
zeanes@newsobserver.com
In March, following the collapse of Silicon Valley Bank and Signature Bank, clients moved billions of dollars out of smaller U.S. banks and into money markets and the handful of giant banks deemed to be “too big to fail.”
For Live Oak Bank, a regional bank based in Wilmington, this meant an exodus of deposits.
In the two weeks after a bank run toppled Silicon Valley Bank, Live Oak customers removed around $250 million in uninsured deposits, the company noted during its latest earnings report. This outflow wiped away the more than 6% growth in deposits the bank had seen over the first two months of the year.
But retreating 2023 gains weren’t the Wilmington bank’s primary concern. Its executives were determined to shield their institution from a burgeoning U.S. banking crisis.
“It was a frightening time,” said Live Oak President Huntley Garriott. “There were a lot of unknowns, and contagion is a scary thing.”
Live Oak’s unique banking approach
With around $10 billion in assets, Live Oak straddles the line between a community bank and a regional bank. It’s the fourth-largest state-chartered bank in North Carolina and leads the nation in providing a specific type of small business loan: According to the U.S. Small Business Administration, Live Oak has approved more SBA-sponsored loans, in terms of total dollars, than any other bank in each of the past six years.
Garriott said community and regional banks like Live Oak often make loans that wouldn’t qualify under the blanket tests used by the largest banks.
“We will go through a lot of work in our underwriting to understand the story, to get to know the borrower, to make sure they’re the right person to take on,” he said. “Small businesses, by nature, have more volatility, so you’ve got to be able to work with them and be along for that journey.”
Live Oak Bank, which has no physical branches, has become the largest SBA lender in the country. Live Oak Bank
Even before the current industry upheaval, small and midsize banks have been disappearing in North Carolina, mirroring nationwide sector consolidation. According to the North Carolina Commissioner of Banks, there were 87 state-chartered banks in April 2003, 71 in April 2013, and only 35 last month.
“You’ve seen deposits declining in the smaller bank sector,” said Gerald Cohen, chief economist at the Kenan Institute of Private Enterprise, a think tank affiliated with the UNC Kenan-Flagler Business School. “And that is deleterious to commercial and industrial loan activity.”
Live Oak is branchless, serving clients only online. Its workforce includes around 650 people in Wilmington and another two dozen in both Raleigh and Charlotte. In the Triangle, it has an office on North Carolina State University’s Centennial Campus and a small coworking space at American Underground in downtown Durham.
Founded in 2008 by banking entrepreneur Chip Mahan, Live Oak has grown by focusing on specific industries: first loans to veterinarians, then expanding to other recession-resistant businesses like funeral homes and dentists. Four years ago, Live Oak opened a division serving early-stage startups, a mini-version of Silicon Valley Bank.
But since March, the last thing Live Oak has wanted to be is the next SVB.
‘War gaming’ during a crisis
Located about 15 minutes from the beach, Live Oak’s headquarters was a hive of activity the weekend after SVB’s demise.
Garriott described it as “war gaming.”
“The first thing that we did, that I think everyone did, was really access our balance sheet, our liquidity, and start to run scenarios of what could happen,” he said. “You have to do that really fast and have a really good team around you. Where are there available sources of financing and liquidity? We spent the better part of the weekend doing all of that. Talking to our board. Talking to regulators.”
In late March, Live Oak raised its interest rates on deposits .5% in an attempt to attract new deposits.
Originally from Kentucky, Chip Mahan moved to Wilmington in the mid-2000s, after his wife was diagnosed with cancer. The couple wanted to be closer to Duke University, where she was being treated. Live Oak Bank
As deposits dropped and concerns over systematic bank runs mounted, Live Oak executives also weighed their communication strategy. Should the bank broadcast its underlying financial strength with press releases to assure customers, a step taken by some of its competitors? Or would doing so only raise alarms?
“We, at the end of the day, stayed relatively quiet,” Garriott said. “Our customers are largely insured, and we have a lot of capital. We didn’t see the stress, and so we didn’t need to put out the types of releases that others were trying to stop a crisis of confidence. But we were prepared to do so.”
How Live Oak reversed its deposit decline
Compared to the overall U.S. banking industry, Live Oak had a low percentage of uninsured deposits, a key metric many have used in recent months to assess institutional stability. The Federal Deposit Insurance Corporation (FDIC) guarantees up to $250,000 in each account, and any higher amounts are uninsured.
For the first quarter of 2023, 85% of Live Oak deposits were insured, compared to the sector average of 56%. For context, only 10% of SVB deposits were insured at the end of last year.
“My initial reading tells me Live Oak does not have any of the features which triggered a run on SVB,” said Rahul Vashishtha, a professor of accounting at the Duke University Fuqua School of Business who reviewed the bank’s first-quarter earnings report for The News & Observer.
Vashishtha highlighted Live Oak’s “minimal reliance on uninsured depositors” as well as its little unrealized losses on its loan portfolio.
In its earnings report, released on April 27, Live Oak reported having $4.2 billion in cash and immediate borrowing capacity, enough to cover three times its uninsured deposits.
In the past 10 years, Live Oak Bank’s campus in Wilmington has grown to multiple buildings. Zachery Eanes zeanes@newsobserver.com
Live Oak actually finished 2023’s first quarter with higher total customer deposits, up 2.7% — a reversal Vashishtha called “astounding.”
While it hemorrhaged uninsured deposits, Live Oak continued adding new accounts in the weeks after the crisis began. Around March 23, its balances began to bounce back. Elevated savings rates may have drawn in new accounts while business owners like Alex Lassiter, the CEO and founder of the startup Green Places in Raleigh, came to Live Oak after fleeing SVB.
“They’ve been great to work with and good partners,” Lassiter said.
Over the past two months, the branchless Wilmington bank has bucked an industry trend among small U.S. commercial banks, which overall have not seen their post-SVB deposits return, according to data from the Federal Reserve.
But Live Oak wasn’t the only North Carolina bank to end the volatile first quarter with deposits up. First Bank, a commercial bank in Southern Pines, saw its balance rise 3.7%. Asheville’s HomeTrust Bank and Catawba County’s Peoples Bank each reported even deposit change between Jan. 1 and March 31.
“I’m surprised at that,” Cohen at the Kenan Institute said of the absence of deposit losses. “Because the (sectorwide) data I’m looking at is suggesting otherwise.”
Deposits rebounded. Stock price hasn’t
But even as deposits surpassed pre-crisis levels, the value of community and regional banks on the stock market have sunk since Silicon Valley Bank’s downfall.
For the year, Live Oak stock is down 25%. Peoples Bank is down 46%, First Bank down 24%, and HomeTrust down 11%.
Since Jan. 1, the share price of PacWest, a California-based business bank that many speculate is operating on shaky ground, has plummeted 66%. Conversely, banks considered “too big to fail,” have seen modest stock declines (like Wells Fargo) or even increases (like Chase).
“What you want is the market to be a reflection of the performance of the business,” Garriott said. “Not the market to actually drive the performance of the business. When you’re in that position, it’s difficult.”
U.S. banking concerns are certainly not over.
On May 1, First Republic Bank became the third major U.S. bank to fall this year after a bank run. Many believe the question is when, not if, additional banks will fail.
At Live Oak, Garriott said the feeling is “cautiously optimistic.”
“I don’t think anybody is declaring victory,” he said. “But if you didn’t look at the news, and you didn’t look at our stock price, with the exception of the outflows of uninsured deposits for the two weeks at the end of March, you wouldn’t actually know anything happened.”
This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work.
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This story was originally published May 25, 2023, 7:00 AM.
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Brian Gordon is the Innovate Raleigh reporter for The News & Observer and The Herald-Sun. He writes about jobs, start-ups and all the big tech things transforming the Triangle.
After acquiring the remains of Silicon Valley Bank in March, First Citizens BancShares is counting on higher rates at its direct bank — as well as outreach to the failed bank’s customers, many of whom have moved their funds elsewhere — to shore up its deposit base.
The good news is that after Silicon Valley Bank deposits declined by roughly $12 billion in the first two-and-a-half weeks after the acquisition, they appear to be stabilizing. In the past four weeks, deposits from the collapsed bank have hovered in the $41 billion range.
“We continue to focus on client outreach,” Peter Bristow, the bank’s president, told analysts during its first-quarter earnings call. He expressed confidence that some of Silicon Valley Bank’s old clients will move their money back as they realize their deposits are safe at First Citizens.
But First Citizens does not believe the outflows are over, either. It expects another $8 billion of deposits to run off between now and the end of the year. That’s because SVB clients — including fast-growing startups and technology companies — keep spending more venture capital investment dollars than they are collecting, First Citizens said.
To counteract the outflows, First Citizens is using its nationwide online bank, CIT Bank, to “quickly add balances through competitive offerings,” Bristow said. Excluding deposits tied to Silicon Valley Bank, the company’s deposits have increased by about $2.6 billion since the end of March, in large part because of higher rates being offered at CIT Bank.
On Wednesday, CIT Bank was offering a 5% annual percentage yield on a six-month certificate of deposit, among the highest rates available at Bankrate.com.
First Citizens expects that additional Silicon Valley Bank outflows will be offset by approximately $10 billion of deposit growth at its direct bank, Chief Financial Officer Craig Nix said during the call.
It’s been just over six weeks since Raleigh, North Carolina-based First Citizens purchased all of SVB’s customer deposits, substantially all its loans and certain other assets of the failed bank from the Federal Deposit Insurance Corp. The FDIC had set up a bridge bank to protect depositors following SVB’s swift and turmoil-inducing collapse.
The deal expanded the scale and geographic reach of First Citizens, which has now completed two major acquisitions in less than 15 months. It also offers additional capital and growth opportunities, and deepens the bank’s presence in the technology sector, the company said Wednesday.
In total, the acquisition included $106 billion of assets, doubling the size of First Citizens, which had $214.7 billion of assets as of March 31. First Citizens bought $68.5 billion of loans, $35.3 billion of cash and interest-earnings deposits at banks and nearly $57 billion of customer deposits, which shrunk to $41.4 billion by May 5, the company said.
Like New York Community Bancorp, which purchased most of Signature Bank’s deposits and certain loan portfolios after the latter was shut down by regulators in mid-March, and has similarly warned about further deposit runoff, First Citizens is hoping that some of its lost deposits will return.
“While it is early, we have seen initial positive results in the first clients we have contacted,” Nix said Wednesday. He said the company is “cautiously optimistic” that deposit and loan runoff won’t be as steep as predicted.
Growing core funding is one of First Citizens’ top priorities going forward. So too is the retention of Silicon Valley Bank employees, especially “key revenue-generating employees and the staff to support them,” said CEO Frank Holding Jr.
He acknowledged that there has been some turnover since the deal was announced, but expressed confidence that Silicon Valley Bank “has one of the deepest and most experienced benches of any financial institution serving the innovation economy.” And he said that First Citizens is “committed to maintaining and growing [the bank’s] market by leveraging this deep-seated talent and strength …”
Though the Silicon Valley Bank acquisition has posed some funding challenges for First Citizens, it gave a large boost to the bank’s profits during the first quarter.
First Citizens reported net income of $9.5 billion, up from $271 million during the year-ago period. The increase was the result of a preliminary gain on acquisition of $9.8 billion.
The bank reported $28 million of acquisition-related expenses during the quarter, with overall noninterest expenses totaling $855 million, up from $810 million during the first quarter of 2022. The company expects to incur expenses of between $4.2 billion and $4.3 billion for the full year, it said.
Before Silicon Valley Bank failed, its own noninterest expenses were about $2.6 billion annually, First Citizens said. Between 25% and 30% of that total is expected to fall off as a result of combining the two companies, including the consolidation of certain duplicate back-office operations, the company said.
First Citizens is still in the early stages of integrating Silicon Valley Bank, but it did report some progress on Wednesday. Company executives have held initial meetings with SVB leaders and innovation economy clients, and they have arranged firmwide town hall meetings and training sessions, First Citizens said in its first-quarter earnings presentation.
Analysts wanted to know if First Citizens is planning to use some of its capital, which now tops its targeted range, for share repurchases. The common equity Tier 1 ratio of the combined company is 12.53%, well above First Citizens’ target of 9% to 10%.
Executives said it’s too early to say whether they will use excess capital for buybacks. They are preparing a new capital plan that they expect to share with the board of directors in late July.
Jammu and Kashmir Bank has announced its highest-ever net annual profit of ₹1,197 crore in the results for the financial year 2022-23.
With a decade-high capital adequacy ratio of 15.39 per cent and NPAs at an eight-year low of 6.04 per cent, the bank also recorded its highest-ever quarterly profit of ₹476 crore in the last quarter.
“Jammu and Kashmir Bank has recorded ₹1,197 crore as net profit for FY2022-23 which is the highest ever annual profit,” a bank spokesperson said.
“The bank’s gross and net NPA as percentages to gross and net advances improved considerably to 6.04 per cent and 1.62 per cent respectively, compared to 8.67 per cent and 2.49 per cent recorded last year.”
The growth of advances outpaced the increase in deposits.
While advances grew by 17 per cent to ₹82,285 crore, deposits increased by around 6 per cent to ₹1,22,038 crore.
‘Progressive phase’
“It is a great feeling to deliver better-than-promised annual numbers. Looking back to March 2022 with these set of numbers, I see an unmistakable shift in performance, as well as the functioning of the bank,” Managing Director and CEO Baldev Prakash said.
He said after revamping the business strategy to reduce concentration risk, the loan book in return on investment has grown by more than 20 per cent during 2022-23.
“While making our balance sheet stronger on a daily basis, we have now entered into a progressive phase wherein business growth coupled with process excellence is all set to yield better returns to all stakeholders of the bank,” Prakash added.
Martin Gruenberg, the FDIC’s chairman, has said he would give special consideration to the fee burden on smaller lenders.
Anna Rose Layden/Photographer: Anna Rose Layden/B
The U.S. is poised to exempt smaller lenders from kicking in extra money to replenish the government’s bedrock Deposit Insurance Fund, and instead saddle the biggest banks with much of the bill.
Smaller lenders with less than $10 billion of assets wouldn’t have to pay, said the people, who weren’t authorized to discuss the deliberations. There were more than 4,000 institutions under that threshold at the end of last year, FDIC data show.
Depending on the size of their deposit portfolio, some banks with as much as $50 billion of assets could also avoid the payments, which might be spread out over two years or paid at once, two of the people said.
Under the plan, bigger lenders would all face the same fee structure, but could end up having to kick in more money because of balance sheet size and number of depositors, the people said. The riskiness of deposits won’t be a factor.
A political battle has been raging over who should be on the hook for refilling the fund after it was depleted by billions of dollars when the government took the extraordinary step of making all SVB and Signature depositors — even uninsured ones — whole. Smaller banks have lobbied hard to avoid paying the so-called special assessment fees, in addition to the contributions that all lenders make to fund quarterly.
The FDIC declined to comment on its plans. Martin Gruenberg, the agency’s chairman, has said he would give special consideration to the fee burden on smaller lenders.
The DIF, as the fund is known, is a linchpin of the U.S. financial system as it’s used to insure most accounts for up to $250,000. It’s refilled by all insured banks paying quarterly fees known as assessments. The amount is based on formulas.
At Signature and SVB, many depositors had millions in their accounts — meaning they were uninsured — and were businesses that desperately needed the cash. The FDIC declared a “systemic risk exception” to use the fund to repay those depositors, in addition to those who would fall under the $250,000.
The FDIC has said that covering uninsured depositors will cost the DIF $19.2 billion and would be paid by special assessment fees. The agency may vote next week to introduce its plan for charging them and then take public comment on the proposal, before finalizing it months later.
The move to use the DIF to cover uninsured depositors has jump-started a long-simmering debate over whether the $250,000 cap needs to be raised. On Monday, the FDIC said it supported expanding coverage to business and laid out three options for overhauling the fund.
Beyond the special assessment that could be proposed next week and the broader overhaul considerations, the agency is also poised to announce changes to the regular quarterly fees that banks have to pay into the DIF. That plan will help blunt any impact from the First Republic to the DIF, the people said.
“Our products are undifferentiated, generally speaking. They’re good products, but they’re undifferentiated,” First Republic Founder James Herbert II said in a video for his induction into the Bay Area Business Hall of Fame. “What’s differentiated is the people and their passion, their caring for clients and the service they deliver,”
Jamey Stillings
James Herbert II spent four decades building one of the nation’s 20 largest banks. Then, in the span of just seven and a half weeks, the 78-year-old founder saw it all come crashing down.
First Republic Bank, which Herbert founded in 1985, collapsed on May 1 after being toppled by a deposit run. As the San Francisco bank’s executive chairman, Herbert was involved in desperate efforts to arrange a private-sector solution. But after those efforts failed, he was left to watch as the Federal Deposit Insurance Corp. seized the bank and sold it to JPMorgan Chase.
Herbert is taking the bank’s failure hard, according to his friend Frank Fahrenkopf Jr., a longtime First Republic board member. In recent days, Herbert has been staying with family members in Jackson Hole, Wyoming — sitting in the backyard, looking at the Grand Tetons and trying to forget what went wrong, Fahrenkopf said in an interview.
“The bank was his life. It’s a tragedy for him,” Fahrenkopf said. “I call him every day to make sure he’s doing all right.”
The story of First Republic’s demise has several elements. It’s about the impact of fast-rising interest rates on a large mortgage portfolio that quickly lost value, as well as about the fears sparked by the March 10 failure of Silicon Valley Bank.
But it’s also a deeply personal story. The son of a banker, Herbert built his own large banking franchise before agreeing to its $1.8 billion sale. He later regained control, then held on to the CEO job past age 75, all while collecting pay packages that rivaled the CEOs of larger banks. Finally, approximately a year after he ceded day-to-day control, he watched it all crumble.
Herbert declined to comment for this story. People who know him said that he built First Republic around a distinct business philosophy, which focused on providing exceptional service.
The bank’s branches were known for offering fresh-baked chocolate chip cookies and wood-handled umbrellas to its well-to-do clients. During the pandemic, when some big banks raised their hourly minimum wages above $20, First Republic hit $30 per hour.
“The bank reflected Jim’s view that customer service could play a central role in clients’ lives,” said Tim Coffey, an analyst at Janney Montgomery Scott. “And it worked until interest rates went parabolic.”
‘Exceptional service’
Herbert’s father, also named James, was a longtime banker in Ohio who eventually served as president of the Ohio Bankers Association. When his son graduated from college in the mid-1960s, he offered some career advice: Don’t become a banker.
The younger Herbert had other ideas, though. One of his earliest jobs was at Chase Manhattan Bank, a predecessor to the industry behemoth that swooped in this week to purchase First Republic.
During the early 1980s, Herbert and a partner, Roger Walther, bought two California-based thrifts and formed a holding company called San Francisco Bancorp. After selling that firm in 1984, they opened First Republic Thrift & Loan the following year.
First Republic took savings deposits and offered jumbo mortgages, largely to wealthy consumers. In 1986, when First Republic held an initial public offering, it had a total enterprise value of $23.3 million. But the bank was well positioned for growth.
There were lots of affluent households in the Bay Area, where First Republic was based, as the region rode the tech revolution. First Republic later expanded to other well-off coastal cities, including New York, Boston, Los Angeles, San Diego and Palm Beach, Florida, and grew its wealth management business.
“The real story of First Republic is exceptional service — exceptional service delivered by exceptional people, all the time, every day, to every client,” Herbert said in a video for his induction into the Bay Area Business Hall of Fame.
“We have products, but all banks have products. Our products are undifferentiated, generally speaking. They’re good products, but they’re undifferentiated. What’s differentiated is the people and their passion, their caring for clients and the service they deliver,” he added.
During the mortgage boom of the early 2000s, Herbert got an offer to sell First Republic to Merrill Lynch. He was initially reluctant. But the deal he struck with Merrill in 2007 allowed the bank to keep its brand, its management team, its offices, its employees and substantial authority to make decisions.
First Republic grew its assets from $22 billion in 2010 to $212.6 billion at the end of last year.
Eric Thayer/Bloomberg
Then came the 2008 financial crisis. Merrill Lynch, on the verge of failing, was acquired by Bank of America, which had a competing private bank and wasn’t a good fit for First Republic. In 2009, Herbert led a group that raised $2 billion to buy back the bank. And the following year, in late December, First Republic went public for the second time. The spinoff was lucrative for Herbert, whose compensation in 2010 totaled $36.3 million, most of it from stock option awards.
Growth continued at a rapid and steady pace, as a sustained period of low interest rates drove heavy mortgage volumes. First Republic went from $22 billion of assets three months prior to its second IPO to $55 billion of assets in the fall of 2015. And Herbert benefited handsomely.
His annual compensation fluctuated, but there were years where it rivaled the sums paid to the CEOs of very large banks. In 2012, Herbert’s total compensation was $15.2 million, mostly in stock awards.
And in 2021, Herbert was paid $17.8 million, again mostly in stock awards, according to the bank’s disclosures. Among U.S. commercial banks, only the CEOs of JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and PNC Financial Services Group collected more money that year.
As of March 2022, Herbert owned more than 800,000 shares of the company’s common stock, representing 0.4% of the total shares available, according to the bank’s proxy statement last year.
‘A silver platter’
During his final decade at the helm of First Republic, Herbert had a good deal of stature in the industry. In 2018, the Federal Reserve Bank of San Francisco appointed him to the Federal Advisory Council, which typically meets four times per year with the Fed’s Board of Governors to dismiss economic and banking issues.
At First Republic, questions were arising about who would succeed Herbert. Initially, the bank’s only CEO in its nearly 40 years of existence was set to remain chairman and chief executive through 2017, and to stick around as executive chairman through 2021.
But that deal was reworked, and then it was reworked at least three more times. In 2021, Herbert, then 77, was set to remain CEO through the end of last year, and Hafize Gaye Erkan, the bank’s then-president, was named co-CEO, setting her up as Herbert’s heir apparent.
But in an unexpected move, Erkan resigned from her post on Dec. 31, 2021, just two weeks after the company announced that Herbert would soon begin a medical leave of absence to address a coronary health issue. In March 2022, then-Chief Financial Officer Michael Roffler, who had been appointed interim CEO, was named to the post permanently and joined the bank’s board of directors.
Herbert, meanwhile, became the executive chairman, a role that allowed him to stay active “in the development of the bank’s overall strategy, preservation of its unique culture and maintenance of key relationships with clients and shareholders,” according to the bank’s 2022 proxy statement.
First Republic’s loan growth accelerated over the last three years, with total loans increasing by 48% between the end of 2020 and the end of 2022.
The bank was his life. It’s a tragedy for him.
Frank Fahrenkopf Jr., a longtime First Republic board member, on the bank’s founder, James Herbert II
Last year was an especially good year. The bank reported record-setting loan growth, loan-origination volume, revenue and earnings per share. Growth continued even as mortgage lending volumes fell industrywide, with the bank’s residential real estate book swelling by 28% between the first quarter and the fourth quarter.
At the end of 2022, First Republic’s assets were $212.6 billion — a nearly tenfold increase in the 12 years since Herbert bought back the bank.
In a January 2023 call with analysts, Herbert said the industry’s slowdown in mortgage lending presented “an extraordinary opportunity” for First Republic to take market share.
“Moments like this are very special,” Herbert said. “The volume of demand is down, we all know that … but the disruption that’s going on in the mortgage market … is just handing us [opportunity] on a silver platter.”
First Republic’s focus on mortgage lending, including its push for additional growth as the Federal Reserve began raising interest rates, ultimately contributed to its undoing, said David Chiaverini, a banking analyst at Wedbush Securities.
“The way that they were winning against the competition is by undercutting on price,” Chiaverini said this week in an interview. “They were offering what were essentially long-duration jumbo mortgages at an attractively low rate, which is great for customers and leads to fast growth.”
As other lenders scaled back their mortgage originations amid rising interest rates, First Republic faced questions about its ability to attract deposits while continuing to extend new loans. Herbert argued that First Republic’s reputation as an experienced and high-value lender would enable it to weather a potential downturn.
“Most of our business is with existing clients and their direct referrals,” he told an analyst during First Republic’s July 2022 earnings call. “When their friends are having trouble getting something done, they say, ‘You ought to try First Republic.’”
The bank’s push-forward mentality led to a liquidity crunch, Chiaverini said. After rates rose, the bank faced the prospect of having to sell mortgages at below par value to raise capital, since the market value of those loans had fallen, he said.
“That’s why it ended up failing. No investor wanted to recapitalize First Republic, just like they didn’t want to recapitalize Silicon Valley Bank,” Chiaverini said. “They viewed it as throwing good money after bad, given how deep of a hole their balance sheet was in.”
‘Demise can happen very quickly’
During the first three months of this year, Herbert was among a handful of First Republic executives who sold millions of dollars of First Republic stock, according to regulatory filings. The shares were priced on average in the $130-per-share range, and Herbert’s stock sales totaled $4.5 million, The Wall Street Journal reported in March.
The sales were in line with Herbert’s annual estate planning and philanthropic donations, a spokesperson for Herbert told The Wall Street Journal.
And they represented about 5% of Herbert’s holdings, according to a source familiar with the situation. “It’s important that people have that perspective,” this source said. “He held onto a vast majority of his shares.”
When Silicon Valley Bank failed, First Republic was particularly vulnerable to the fallout. Both banks were based in the Bay Area, and both had upscale clienteles.
“I’ve spent a lot of nights not sleeping thinking about this: What could we have done to have avoided this?” said Fahrenkopf, the longtime First Republic board member. “And I came to the conclusion: If our bank was headquartered in Reno, Nevada, rather than San Francisco, so close to Silicon Valley Bank, this probably wouldn’t have happened.”
One First Republic customer who withdrew funds from a branch in San Francisco on Saturday, March 11 — one day after Silicon Valley Bank was seized by the government — described an anxious scene, with many customers still waiting to be served at 2 p.m., after the branch was scheduled to close.
A First Republic employee climbed onto a file cabinet to tell the assembled customers that their requests would be fulfilled, but also expressed uncertainty about whether the bank would survive the weekend, according to the customer, who spoke on condition of anonymity.
The next day, another regional bank, Signature Bank in New York City, also failed, as fear spread.
By the end of March, First Republic’s deposits, which totaled $176.4 billion at the end of last year, had fallen by more than $100 billion, not counting the $30 billion that 11 big banks deposited at the bank on March 16 in an effort to stabilize the situation.
“Certainly the outflow of $100 billion in a three-week period is a major factor, and … before Silicon Valley, not something that anyone had really anticipated,” said the source who spoke about Herbert’s stock sales.
During First Republic’s final weeks, company executives mounted an all-hands-on-deck effort to find a private-sector solution that would keep the bank out of government receivership — and avoid wiping out shareholders.
As executive chairman, Herbert was no longer required to be involved in the bank’s day-to-day operations. But the crisis created an intense level of pressure that was hard for him to ignore, and his involvement increased. Still, the efforts failed, and First Republic became the second largest bank failure in U.S. history.
The level of complexity involved made a private-sector solution hard to achieve, said the source familiar with the bank’s situation.
The demise of three regional banks in the last two months is a reminder of how rapidly bank runs can happen. “As soon as an institution loses the confidence of its customers, demise can happen very quickly,” said Coffey of Janney Montgomery Scott.
But Fahrenkopf said that he’s advised Herbert not to dwell on the past. “It doesn’t do any good to look behind,” Fahrenkopf said. “We can look forward. Don’t fret too much.”
Businesses that want to safely stash sums of cash above Federal Deposit Insurance Corp. limits have options that don’t involve juggling multiple accounts at multiple banks.
They can invest directly in government money market funds or Treasury bills. They can inquire about programs within their bank, such as deposit networks and reciprocal arrangements engineered by IntraFi and the like, or automatic sweeps of amounts exceeding $250,000 into money market mutual funds.
Or they can turn to fintechs that offer a tech-forward version or combination of the above.
The disconnect between the size of accounts that enterprises typically maintain and deposit insurance levels has existed for a long time, said Brian Graham, a partner at Klaros Group. But the three days between Silicon Valley Bank’s failure and the FDIC’s assurance that it would cover uninsured deposits jolted people into action.
“There has been a lot of scurrying around in the last several weeks as these organizations figure out what they want to do,” said Graham in a March interview.
Fintechs such as Meow or Vesto, and business-oriented neobanks such as Brex and Mercury, have mechanisms that let business customers invest idle cash in Treasuries or money market funds. Some companies began turning to Meow and Vesto well before the recent bank collapses, particularly for easy investing in low-risk, high-yield instruments. As such, the reasons they have to stay are likely to persist even if the FDIC elevates levels of deposit insurance for businesses.
“The fintechs are moving faster” than banks, said Graham. “They are piecing things together to come up with solutions that they expect will appeal to customers, and they are not wed to a single set of tools.”
The safety of each investment product varies.
“There are lots of flavors of money market mutual funds and lots of flavors of government securities,” said Graham. “U.S. Treasury is a different credit risk than some local sewer authority in a muni bond.”
Mercantile, which partners with organizations to create custom branded cards, has been holding excess cash at Vesto the past six-plus months. Vesto defines itself as a cash management platform for venture capital-backed startups and mid-market businesses. It builds customized portfolios for its customers according to their risk tolerance, liquidity needs and more, typically investing in Treasury bills, money market funds, corporate bonds and certificates of deposit. The back-end custodian is BNY Mellon Pershing.
“With the market changing and Treasuries being a little more interesting, we wanted something that was very easy to use and exposes us to a high-yield Treasury option without endangering cash at hand,” said Samuel Poirier, CEO and founder of Mercantile. “Vesto understood the need to take cash out on a monthly basis to fund the company.”
He chose Vesto, which launched in 2022, because of its simplicity and its understanding that companies such as his will withdraw funds on a regular basis. He only invests in U.S. Treasuries through Vesto.
Benjamin Döpfner, founder and CEO at Vesto, says he has seen an influx of new customers since SVB collapsed.
“There has been a desire to diversify their holdings and cash,” he said. “We found a lot of companies have almost all their cash sitting in one bank account.” He says his customers choose Vesto to find a secure home for their cash and to earn high yields.
“Oftentimes founders and CEOs don’t have the capital markets experience to do this themselves,” said Döpfner.
Döpfner describes the company’s investment style as “incredibly conservative.”
“We take the viewpoint that safety and liquidity are priority number one and yield is priority thereafter when managing corporate cash,” he said. “We only work with highly liquid ‘ultra-low risk’ investment products like U.S. Treasuries.”
Stocktwits, a social network for traders, began investing in Treasury bills through Meow well before SVB and Signature Bank collapsed in March. Meow is a banking platform that lets businesses purchase Treasury bills using partner registered investment advisors and broker-dealers.
“As the Fed started to raise rates, we saw an inverse yield curve, so it made sense to put some of the firm’s capital to work in addition to diversifying credit risk,” said Philip Picariello, vice president of finance and operations at Stocktwits.
He considers the firm’s capital as being divided among three buckets: immediate liquidity for payroll and accounts payable, near term liquidity to fund product development and core capital. Like Poirier, he wanted to earn yield in a low-risk way.
“When I started digging into Meow I liked the team and the way they built it,” said Picariello. “I was sold on the fact that BNY Mellon Pershing is in the back end. It’s very seamless to move money over, allocate it, and ladder it out.” Stocktwits uses an insured deposit sweep program at its bank to protect funds that should stay liquid in the near term. He allocates the rest to Treasuries through Meow based on what the company needs in the next month, three months or six months.
As suggested by Stocktwits’ strategy, these accounts are not meant to hold operating cash.
“When you want to get your money, it takes some time,” said Graham. The success of this strategy “depends on your ability to look ahead and know when you need the cash.”
Picariello is not concerned.
“If a corporate treasurer or chief financial officer has a good handle on upcoming liabilities, you should never have to worry about it taking a day or two to get your money,” said Picariello.
Döpfner said almost all the investment products his company works with are highly liquid, and customers can usually access their cash within one to two business days. Brandon Arvanaghi, CEO of Meow, said in a March interview that it would take customers one to two business days to receive their funds after selling their T-bills.
Business-oriented neobanks have developed their own products they hope will entice customers to park large amounts there instead of at regular banks. Brex has increased its deposit insurance from $1 million to $6 million since SVB’s failure by using a sweep network. Customers can choose to store funds above that limit in a BNY Mellon money market fund. Mercury has increased the amount of cash it can protect per customer to $5 million in a product called Vault. Deposits exceeding $5 million are placed in a money market fund that is almost entirely invested in U.S. government-backed securities.
Brex and Mercury touted thousands of new customers since the bank failures in March, although it’s an open question as to how many they will keep over the long term. Döpfner of Vesto and Arvanaghi of Meow also report a wave of new customers in the wake of those disasters.
“These kinds of alternatives tend to be really effective if you know you won’t need the money for X period of time and you’ll get a heads up when you need it,” said Graham.
Fintech accelerator Expert Dojo, a former client of Silicon Valley Bank, moved some of its deposits to First Republic Bank in March to strengthen the bank’s deposits and help avoid a similar fate to SVB — which was ultimately unsuccessful. In the blog “Taking a Stand for Regional Banks: Expert Dojo Will Be Depositing Money […]
