You have surely seen the news of three bank failures in the past several days. On Wednesday of last week, Silvergate Bank, La Jolla, California (Silvergate) announced that it was shutting operations and conducting a voluntary liquidation overseen by the California state bank supervisor (DFPI). Then on Friday, Silicon Valley Bank, Santa Clara, California (SVB) was taken over by the Federal Deposit Insurance Corporation (FDIC) becoming the second largest bank failure in US history. Last night, federal and state regulators also closed Signature Bank, New York, New York (Signature) because of systemic risk associated with cryptocurrency.
Fortunately, the Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg announced on Sunday that they approved actions enabling the FDIC to complete its resolution of SVB and Signature in a manner that fully protects all depositors. Depositors will have access to all their money starting Monday, March 13. No losses associated with the resolution of SVB or Signature will be borne by the taxpayer. These decisive actions were taken to protect the U.S. economy by strengthening public confidence in our banking system.
Nevertheless, this raises lots of anxiety and questions about the banking system and what risks you might be facing with your deposit accounts. The purpose of this email is to demonstrably state that Freedom Bank is different from these banks and that your money remains safe here. I also want to explain what happened to SVB and contrast it to Freedom Bank. We remain a stable and resilient community bank with 22 years of history, a proven business model, abundant liquidity, and robust capital levels. We are not experiencing the challenges faced by these banks.
Why Freedom is Different
Freedom Bank has certainly grown over the past several years, but we are funded by core deposits from customers just like you. At 12/31/22, we had approximately $850 million in deposits and 89% of our deposits were categorized as core as defined by the FDIC.
Perhaps most importantly, we do not have any cryptocurrency, fin tech or venture capital/private equity deposits that were the primary drivers of deposit runoff at Silvergate, SVB and Signature. In addition, we have wholesale deposits that have contractual maturities and comprise 27.5% of our total deposits reducing potential volatility.
Freedom Bank has on-balance sheet liquidity, comprised of cash and highly liquid securities, totaling $151 million, in addition to $100 million of unused borrowing capacity between credit lines at the Federal Home Loan Bank and the Federal Reserve Bank of Richmond. Therefore, $251 million in total liquidity representing 26% of total assets and 30% of total deposits.
As of December 31, 2022, we had $199 million in securities and all but $17 million were carried as Available for Sale (AFS) and already marked-to-market on our balance sheet through Accumulated Other Comprehensive Income (AOCI). This is unlike other banks who are loaded with Held to Maturity (HTM) investments that are not marked and therefore when sold create huge losses in the current environment as was the case with SVB last week.
We also have abundant capital with Tier 1 Capital of 13.37% at 12/31/22 compared to the regulatory minimum of 6%. Furthermore, our balance sheet is well managed for rising rates with an appropriate mix of floating rate assets and hedges on our floating rate liabilities to help us maintain strong margins as rates rise.
What happened to Silicon Valley Bank
The banking industry has undergone a rapid transformation through the COVID pandemic period and now with a totally different interest rate regime as world economies address inflationary pressures. However, not all banks have taken the same approach to address or respond to these issues and the banks that have failed appear to have mismanaged multiple elements.
During COVID, SVB experienced rapid growth in deposits from all the stimulus injected into the economy by the Federal Reserve, the pandemic era programs, and related stock market “bubble” in the technology industry. In fact, SVB deposits surged to $200 billion in 2022 from just $60 billion two years earlier.
The bank deployed excess deposits that could not fund loans into fixed rate securities that are now underwater as interest rates rapidly increased from the Fed’s fight against inflation. SVB classified many of these securities as Held to Maturity on its balance sheet which means they are not marked-to-market, and any unrealized losses are opaque to market participants.
This risk was further exacerbated in SVB’s case as its business model was concentrated predominantly in one client vertical – venture capital, private equity, and start-ups. Furthermore, the clients placed their funds in a high concentration of uninsured deposits in accounts structures that can exit the bank quickly when there is a lack of confidence.
As its venture capital clients burned through pandemic era liquidity in their operations and other clients sought safer deposits with higher rates, the amount of SVB’s deposits declined steadily. The bank did not have sufficient on and off-balance sheet liquidity to meet sudden deposit withdrawal requirements that required a sale of $21 billion in AFS securities resulting in a $1.8 billion loss.
As this process accelerated at SVB, the losses from the sale of securities on a relative basis significantly impaired their capital and required the company to raise $2.25 billion in to meet regulatory minimums. The speed with which this unfolded, and the magnitude of losses made the capital raise unsuccessful as the stock price plummeted 60% on Thursday in the face of that reality.
As the stock continued to fall further, many of SVB’s clients began to move money out of the bank causing a classic bank run which technology enabled to happen very rapidly. On Friday, California's financial regulator, the DFPI took possession of SVB, citing inadequate liquidity and insolvency, the agency said. The DFPI appointed the Federal Deposit Insurance Corp. as the receiver. The bank had total assets of roughly $209 billion and total deposits of roughly $175.4 billion as of Dec. 31, 2022.
As the receiver, the FDIC said it will retain all assets from SVB for later disposition. Depositors at FDIC-insured banks are subject to up to $250,000 deposit insurance in the event of a bank failure. At the time of the bank's closing, the magnitude of deposits in excess of the insurance limits was undetermined by the FDIC, but estimates are that they are over 80% of total deposits.
Freedom Bank’s efforts to invest in our people and technology, preserve strong liquidity, strengthen our balance sheet, improve the bank’s credit profile, and reduce non-interest expenses should serve us well and enable us to remain a very strong bank in this environment. Freedom Bank has taken all measures to maintain our safety and soundness during this challenging period.
Freedom Bank is ready to assist you and continues to embrace our values of IDEAS while delivering great customer service when our clients need it the most. The privilege of serving our clients and communities is an honor for which we are extremely grateful. We have the requisite technology, digital products, and, most importantly, the skills and dedication of a talented team of bankers here are Freedom.
We are confident that, together, we will not only continue providing you great service, but we will also emerge from the challenges of this economic environment stronger than ever. We also stand ready to help those clients or friends that you have who need more advice or are seeking an alternative to a bank that might be impacted by this situation.
Please reach out to me or your relationship manager if we can answer any questions or help in any other way.
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