America’s smallest lenders are seeing an increase in deposits after the failure of three U.S. banks dented confidence in the stability of the sector.
The inflows at community banks — typically tight-knit lenders that serve local businesses and hold $10 billion or less in deposits — came in recent days as consumers witnessed the biggest U.S. bank failure since the financial crisis with Silicon Valley Bank followed by turmoil for regional lenders.
Jill Castilla, president of Citizens Bank of Edmond in Oklahoma, said her firm saw about a 2 percent bump in consumer deposits and business loans in the past three days. The 120-year-old lender has about $320 million in deposits and more than 85 percent of that is insured.
“We are very disciplined in our lending and currently have zero non-performing loans,” she said.
Leaders at community lenders said in interviews they’re not tightening their lending standards — which suggests that, for now, it’s business as usual for local lending. Economists are closely monitoring small and medium-sized financial institutions for potential domino effects on confidence, borrowing and the broader economy.
The roughly 4,750 community banks in the U.S. make up about 60 percent of all small business loans and hold nearly $5 trillion in deposits. A deposit flight and tighter loan controls would cut off a vital funding source for small businesses, which employ about half of Americans, and choke off investment.
The largest lenders — which hold the majority of U.S. customer deposits — also saw a boost to cash inflows this week, including JPMorgan Chase & Co. and Bank of America Corp.
Flagship Bank in Minnesota was bracing for chaos after SVB collapsed. Chief executive officer Andy Schornack spent the weekend briefing his managers, then he hunkered down Monday morning by the phone, ready to soothe anxious customers.
He got a total of two calls — and one of them was from his wife, to discuss their kids’ upcoming hockey games.
“None of the activity that’s going on is impacting Main Street or community banks,” Schornack said by phone from his office. Schornack, who saw an increase in deposits, isn’t tightening lending standards as a result of the bank fallout, saying that he’s “fully open to get additional business. I hope that we earn more clients that banked with SVB and others.”
Sentiment, however, could shift quickly. Swiss bank Credit Suisse Group AG sparked a global market rout Wednesday after its largest shareholder said he wasn’t open to further cash injections. And on Thursday, First Republic Bank, a San Francisco firm specializing in private banking and wealth management, saw its shares plunge and then recover following talks of a rescue orchestrated by the country’s biggest banks.
Anticipating that small and and medium-sized banks may become more conservative about lending to preserve liquidity, Goldman Sachs Group Inc. estimated that a pullback in lending at banks with $250 billion or less in assets would shave 1/4 percentage point off 2023 gross domestic product growth. JPMorgan economists said a slowdown in credit growth could take up to 1 percent off GDP in coming quarters.
The U.S. banking system is well capitalized in aggregate, but the question is whether “that means every single bank is well capitalized or whether there’s some banks with particular vulnerabilities or risky levels of capital, lurking in the shadows,” said Neil Shearing, group chief economist at Capital Economics.
Community lenders immediately sought to distance themselves from SVB, which specialized in tech startups and had the vast majority of its U.S. deposits uninsured.
The percentage of insured deposits is well above 60 percent for small lenders, according to Federal Reserve data compiled by Apollo Global Management. And community banks aren’t as reliant on high-net-worth individuals and venture capital.
“I’m hearing from a lot of folks who are actually seeing new deposits roll into their community banks — it’s sort of that local, trusted resource,” said Rebeca Rainey, president of Independent Community Bankers of America. “I’m not hearing folks saying that they’re pulling back on anything.”
Brad Bolton, CEO of Community Spirit Bank in Alabama, talked with colleagues at the annual gathering of independent lenders this week. They reported either inflows or stable deposits, he said.
“We haven’t seen an inflow but also no outflow — and that’s what’s important,” said Bolton, whose bank has $165 million in deposits. “It truly has been just a normal week on Main Street.”
Meanwhile, Moody’s Investors Service cut its outlook for the U.S. banking system to negative from stable this week.
“This is a confidence issue. This is not based on fundamentals,” said Nathan Stovall, principal bank analyst for S&P Global Market Intelligence. “I don’t think you’re going to have people stop banking because of this.”
The boost at both local and the largest lenders could be a sign that customers are diversifying their holdings— depositing funds across several banks and taking out future loans from different institutions to spread risk, Stovall said.