Spokane-area community banks counter failure fears
Institutions here more balanced than larger ones that recently failedApril 13th, 2023
Many community and regional bank leaders here are focused on alleviating customer fears that two recent large bank failures could lead to further collapses in the banking industry.
Such fallout hasn’t materialized at community banks in the Inland Northwest in part because financial officers here have reached out to their clients to differentiate their institutions from California-based Silicon Valley Bank and Signature Bank, of New York.
Steve Scranton, chief investment officer and economist at Spokane-based Washington Trust Bank, says a simple explanation of the bank failures comes down to a crisis of confidence exacerbated by the advent of instant mass communication.
“Rather than having a broad base of customers that might include restaurants, manufacturing, or accounting … those banks had basically the same customers in the same industry,” Scranton says. “As long as the industry was doing well, they kept their money with the bank. But when the industry started to struggle … they started drawing down deposits to pay their bills and employees, and it really got the ball rolling.”
He says the biggest concentration of customers in any one industry at Washington Trust Bank is 5%, while SVB had 75% concentrated in one industry.
The most recently available financial data for Washington Trust Bank shows an increase in loan activity along with declining deposits and assets.
Deposits in both Spokane and Kootenai counties—where Washington Trust Bank operates 19 branches—totaled $4.1 billion as of Dec. 31, a decrease of about 4.7% from year-end 2021. Assets declined about 6% as well, from $11.1 billion in 2021 to $10.4 billion in 2022; and total net loans and leases increased 9% to $6 billion last year, from $5.5 billion the previous year.
Susan Horton, president and CEO of Spokane-based Wheatland Bank, says serious mismanagement of interest-rate risk likely contributed to the failures at SVB and Signature banks.
After news of the failures broke on March 10, Horton says she and her team jumped into action to relay to customers a message of health and safety at Wheatland and other community banking institutions in the region.
“I personally contacted many customers, and I put together talking points for my team,” she says.
She says that the message to customers is: “Wheatland Bank has absolutely nothing in common with those banks.”
The differences start with the customer base. Horton says both SVB and Signature Bank served a tech-heavy client base in contrast to Wheatland and other community banks that serve customers involved in a variety of lower-risk industries.
Greg Deckard, CEO of State Bank Northwest, agrees and says, “Their model was risky and exotic to begin with, catering to tech startups, venture capital firms, and those types of things that don’t represent our local community banks. Overall, banks here are safe, sound, and resilient.”
Aside from distinctly different customer bases, there are three major differences between community banks and SVB and Signature Bank: deposits, lending practices, and investment strategies, industry executives say.
Wes Veach, president and CEO of bankcda, says that the failures haven’t impacted bankcda’s operations, aside from increased conversations with customers explaining how FDIC insurance works.
“That’s a big difference with a community bank,” says Veach. “Management is much more involved … and has relationships with the customer, and we want to make sure they’re happy and understand what’s going on.”
Mike Wilson, CEO of Spokane-based RiverBank, also has a diverse group of local depositors consisting mainly of business clients.
He says deposits and investments at RiverBank were unaffected by the failures.
“We have not experienced an outflow of deposits related to SVB or the events of the last three weeks,” Wilson says. “We have zero unrecognized losses in our investment portfolio.”
Deckard adds, “At my bank, it’s 100% local deposits, 100% local loans, and 100% local investors. … We just take loans and deposits, and it pays off nicely for us with such minimal exposure. We’re 121 years old, so we manage more conservatively than most, because we want to be around for another 121 years.”
State Bank Northwest opened its third branch in Spokane County last year. As of Dec. 31, 2022, the institution’s deposits totaled nearly $160 million, a decline of about 14% from a year earlier. Net loans and leases totaled $142.7 million, up 9.7% from 2021.
Some bankers here say they don’t understand how executives at SVB and Signature Bank, as well as federal and state regulators, missed a chance to correct their investment weaknesses before it was too late.
Deckard says that State Bank Northwest regularly performs stress tests on each banking examination.
“We model rises in interest rates up … and we model them down,” says Deckard. “When regulators come into my banks, they’re looking at every one of my loans and investments.”
State Bank Northwest holds about one-third of the bank’s assets in overnight cash, he says.
While bank performance data here since the demise of SVB and Signature Bank hasn’t been released yet, Horton says Wheatland Bank isn’t expecting any declines in asset valuations resulting from the failed banks.
She says, “We are seeing some of the longer-term interest rates … actually come down a little bit.”
Horton says some bankers are estimating that their investment values may actually be up so far this calendar year.
The Federal Deposit Insurance Corp., a system that insures deposits, analyzes the safety and soundness of U.S. banks, and regulates consumer protections, is investigating the collapse of SVB and Signature Bank with results expected this spring.
The FDIC also is considering whether insurance premiums will increase for all financial institutions it covers due to the bailout of SVB and Signature Bank.
Wilson, of RiverBank, says it was the right move for the FDIC to step in and protect depositors when it did.
He adds, however, “We like the tone of discussion that suggests that we should not bear the burden of people who were not balancing their balance sheet appropriately.”
On the other hand, Scranton says a premium increase is to be expected as a cost of doing business, because that’s how the program is intended to work.
Bankers agree that increasing regulations is another concern.
Scranton says that the industry could expect to see consolidation of community banks if more regulations are introduced, because of the potential cost to comply with additional rules.
Deckard says, if that happens, community banking’s role as a major employer and large originator of small business and agricultural loans in rural areas will be impacted negatively.
“Every time something happens in the industry, Congress steps in … and their answer to everything is more regulation,” Deckard says. “That regulation flows down to even the smallest of banks, and we have a regulatory burden to prove things we’d never think about doing. Small-town rural America and small businesses get harmed.”
Before Signature Bank collapsed, it was a significant holder of secondary Small Business Administration-backed 7(a) loans purchased from loan originators to free up capital for the originating institutions to continue lending, according to a report by the Portland Business Journal.
Bankcda is a preferred SBA lender, and Veach says he doesn’t expect Signature Bank’s removal from the secondary SBA market to have any effect on banks here.
Veach says his main concern as the crisis ebbs is that consumers might move money from deposit accounts to brokerages or to money market accounts to take advantage of growing interest rates.
“If they take that money out of the banking system, the banks won’t have money to lend, and it’s going to create a credit crisis,” he says. “I don’t see that being the case here, though.”
Deckard says, “We’ve got to stand up and fight and say this is what a community bank is. We are not those banks that you’re reading about in the papers or seeing on mainstream media.”