NJ bankers remain optimistic amid stormy seas

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The failure earlier this year of two banks in California – Silicon Valley Bank and First Republic Bank – and one in New York – Signature Bank – seemed to cast a pall over the entire banking sector, which already faced issues like competition from less-regulated fintechs, rising interest rates, and an inverted yield curve that threatened to upend their traditional lending models. But New Jersey-based bankers say they’ve weathered similar storms in the past.

“Issues like the inverted yield curve tend to be cyclical in nature, and will work themselves out,” said Valley Bank CEO Ira Robbins. “We’ve all been through this before. But this time around, we’re also dealing with a structural issue: the speed of money and information flows. This is a new development, brought about by technological advances, and it will not disappear.”

To illustrate the point, Robbins noted how, in 2008, it took more than a week for a run on deposits to hobble Washington Mutual. “Contrast that with SVB, which collapsed quickly [in less than two days as depositors tried to withdraw some $42 billion] following a flurry of social media posts that questioned the bank’s liquidity,” he added. “The challenge is that when you get failures like SVB, First Republic Bank and Signature Bank – which were isolated, due to their geographic and industry concentrations – then suddenly any financial institution with the word ‘bank’ in its name gets lumped together, even though institutions like Valley Bank do not have that kind of exposure.”

He noted that social media and other outlets are also generalizing another misconception, the perception that all banks have the same exposure to the possibility of commercial real estate defaults. “The perceived CRE challenge has been miscast, due to a lack of understanding regarding the underlying exposure,” he explained. Unlike residential loans, which are often paid off after a certain period, commercial real estate loans are typically refinanced every five to seven years. But a combination of higher vacancy rates – thanks to work from home trends – along with elevated interest rates have some observers questioning whether the loans can be refinanced, and if a wave of foreclosures will result. “The threat is real, but the CRE portfolios tend to be concentrated in larger banks – along with private equity funds, insurance companies and other non-banks – which financed office towers in urban areas. Relationship-driven institutions like Valley Bank do not have much exposure to this asset class,” Robbins said.

Although many banks remain safe and sound, public perception matters a lot. “When the three banks failed, we watched our money flows on an hourly basis,” said Peapack-Gladstone Bank CEO Douglas Kennedy. “At the same time, we contacted customers with uninsured deposits and offered to ‘sweep’ their excess funds into an FDIC-insured account each night at no charge. So, out of our approximately $5.8 billion deposit base, about $120 million moved out, but about $50 million of that flowed back in, so the net percentage outflow was not particularly significant. We also saw opportunity in the crisis: We hired 17 private banking professionals from financial institutions that included First Republic Bank and Signature Bank and will leverage their experience to open our first office in midtown New York.”

Invalid comparison

During the initial phases of the three-pronged bank failures, some social media and other outlets were sounding the alarm about the entire banking system, but Kennedy rejects the comparison. “We pay attention to our balance sheet,” he said. “During times of spiking interest rates, for example, you can’t buy a 20-year bond and go on autopilot, assuming you can sell it early and make a profit — in some cases you need to hedge your balance sheet to reduce these kinds of risks.”

Kennedy, who sits on the board of the Federal Reserve Bank of New York, is concerned about the inverted yield curve — “the banking model is based on the spread between borrowing costs and lending revenue, and it’s almost impossible to get returns when the spread is upside down,” but he recognizes the need to curb inflation. “The Federal Reserve has to slow down economic activity, and since consumers drive 75% of that activity, rates will have to remain elevated until things cool down.”

During periods of turmoil, though, bankers do what’s needed to try to keep things on an even keel. Employees at Kearny Bank, for example, made “thousands of calls” to reassure customers after SVB and other institutions went under, according to Kearny CEO Craig Montanaro. “It was a challenging time, but we advised customers that our bank does not participate in the same sectors as SVB. We and many other New Jersey-based community banks are more conservative. While we are active in commercial and consumer loans, we are not really engaged with the unique segments of venture capital, private equity or crypto community.”

Still, Montanaro and his team are aware of the role that issues like social media play in today’s banking environment. “We do engage in some activity on Facebook, LinkedIn and Instagram,” he explained. “Although our participation basically revolves around how we engage with the community, what we do and who we are, we have internal and external personnel who monitor social media mentions and other activity, so we are aware of what’s going on.”

Institutions like Northfield Bank “are careful about our messaging,” according to Chief Executive Officer Steven Klein, who is also the current chair of the New Jersey Bankers Association. “In March [when SVB went under] something happened on the other side of the country, yet it affected the public’s perceptions of every bank. We monitor social media and can respond quickly to questions or misperceptions; and we fielded incoming calls while making sure our employees were well-informed about the health of our bank. We advised customers that we have been standing strong since 1887, and that resonated with them.”

Northfield Bank takes steps to balance its assets and liabilities, Klein added. “We do it through duration,” he said. “Banks typically face interest-rate risk, since we take in deposits, which can reprice overnight, while lending for longer terms – but our commercial and CRE loans are typically no longer than five to seven years – which limits our risk. In general, banks can also limit their risks with derivative contracts [swaps or other financial contracts that are based on the performance of underlying market factors, like interest rates, currency exchange rates, or commodity, credit, and equity prices], and by selling off some loans to GSEs (Government Sponsored Entities, like Fannie Mae or Freddie Mac) so they no longer retain the loans on their books.”

Institutions like Magyar Bank are also monitoring events and taking steps to respond, according to CEO John Fitzgerald. “We can handle challenges like the inverted yield curve; Magyar Bank does a good job of balancing loans with our deposit products,” he said. “So, although our net interest margin may be impacted in the short run, we will work through this issue.”

He’s currently more concerned with competition from less-regulated fintechs and other non-bank organizations. “Banks are heavily regulated, with certain capital reserve and other requirements,” Fitzgerald said. “Fintechs are generally not subject to the same restrictions, so this is something that our industry representatives and regulators have to address, to level the playing field.”

He said commercial real estate loans, particularly for office properties, make up banking’s biggest exposure. “Fortunately, we don’t have a large office loan portfolio,” noted Fitzgerald. “Multifamily is strong in our markets and, of course, so is warehousing, particularly in New Jersey. So, we’re comfortable with our situation.”

Leaders at other institutions are similarly confident. “We got some calls asking about the health of our bank,” after Silicon Valley Bank, Signature Bank, and First Republic Bank toppled like dominoes, Columbia Bank CEO Thomas Kemly recalled. “But it’s frustrating when people lump all banks in one bucket. The failed banks had unique concentrations, which is not the case for New Jersey community banks. Columbia Bank, for example, has 240,000 depositors, and our loan portfolio includes local small businesses, home mortgages and automobile loans. That’s a lot different than startup California fintechs.”

Although the downfall of SVB, Signature Bank, and First Republic Bank was driven, in part, by social media, that kind of technology, “was not on our radar at the beginning of this year,” Kemly said. “But we’ve since formed a working group to create contingency plans for the possibility of social media attacks. The good news is that we are rock solid, and we ran a short-term social media campaign highlighting our healthy financial ratios.”

Other bankers are similarly confident. Rising interest rates, concerns over commercial real estate loans and other challenges have not fazed First Bank CEO Patrick Ryan, who noted, “These kinds of issues have happened before. This time around, there are reasons to be optimistic, since the economy continues to perform, and it looks like we may have a soft landing.”

He does not dismiss all the concerns, however, pointing out that “while liquidity concerns have subsided since the spring, we’re still dealing with increases in the cost of funds, at the same time that some depositors are shifting accounts that yield lower returns (and that represent less cost to financial institutions) to money market and other higher-yielding accounts. It’s not an existential problem, though — we’ve survived similar challenges, including inverted yield curves, and eventually things stabilize. Banks may realize less of a profit for a while, but this is not a major threat.”