I am sending an update to my March 13th email (Freedom Bank Update) to share what we have learned in the banking industry over the past week. We found that frequent and open communication served us well when we were helping clients during the pandemic with Paycheck Protection Program loans (PPP), and I think the same approach here will help add value during these uncertain times.
Let me say at the outset that on behalf of all my colleagues, we are grateful for the strong support of our clients and enduring confidence of our investors over the last 10 days. This is a testament to the strength of our relationships and the efforts we have made to provide superior service and to maintain a strong liquidity and capital position.
Over the last week, it has been business as usual at the bank and we have seen positive inflows of deposits and lots of new residential mortgage applications thanks to referrals that have come in from our clients. Our culture of IDEAS with personal service by an experienced banking team and industry leading product design and digital tools continues to be recognized.
The banking system is strong and resilient. As President Biden said, “Americans should have confidence in the country’s banks.” The banking industry remains strong and is a source of strength for our economy. The Silicon Valley Bank (SVB) and Signature Bank closures have unique risk factors not representative of the broader banking industry. It has also been encouraging to see private market solutions surface to address the problems here in the US and in Europe.
All customers who had deposits at the failed Silicon Valley Bank (SVB) and Signature Bank have been assured that they are protected, and depositors were granted access to their money last week. The actions taken by regulators mean that small businesses across the country with deposits at these banks can breathe easier knowing they can pay their workers.
First Republic is a San Francisco-based bank focused on wealth management business for wealthy investors. It has a similarly concentrated business model and transactional deposit base like SVB. The bank has sustained large deposit outflows and a drop in its stock by 80%. The larger banks have stepped up and injected $30 billion in deposits for 120 days, which is evidence of the robust capital and liquidity in the US banking industry.
Credit Suisse Group AG based in Switzerland has suffered from governance challenges and business model complexities for years. The market turmoil merely accelerates a set of problems that already existed with sub-par profitability and weak capital level. Over the weekend, UBS Group AG announced the purchase of the company for $3.0 billion, which seems to have stabilized concerns in the global capital markets.
The Federal Reserve and other central banks reported yesterday that they will increase the frequency of seven-day maturity operations from weekly to daily to enhance the provision of liquidity via standing U.S. dollar liquidity swap lines. The lines among these central banks are a set of available standing facilities and serve as a liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit.
Signature Bank was sold yesterday by the FDIC via a purchase-and-assumption agreement with Flagstar Bank of Hicksville, N.Y., for substantially all deposits and certain loan portfolios of the former Signature Bank. The 40 former branches of Signature Bank will operate under New York Community Bancorp's Flagstar Bank subsidiary starting today. As of December 31st, the former Signature Bank had total deposits of $88.6 billion and assets of $110.4 billion.
The Federal Reserve launched a new Bank Term Funding Program (BTFP) on March 13th and now reports that banks have utilized the facility for $11.94 billion through Wednesday. The BTFP offers loans of up to one year to eligible depository institutions pledging as collateral U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets, which will be valued at par.
These government actions and private market solutions should provide confidence to depositors at all banks that their funds are safe. In total, more than 99 percent of banks are “highly capitalized” and far above the most stringent regulatory standards. Hopefully, we will see confidence return to the capital markets this week with all the efforts to resolve impaired institutions and provide liquidity to the system.
FDIC Insurance Protects Bank Customers
Your deposits are protected by FDIC insurance. In the 88-year history of the FDIC, no one has ever lost a penny of an insured deposit. Your deposits will be there when you need them. The FDIC insures up to $250,000 in eight separate account categories per depositor per bank.
The FDIC is completely funded by the banking industry. Every bank pays risk-based premiums each quarter to support the fund. The FDIC insurance fund and all of the agency’s costs come entirely from premiums paid by banks. The industry knows that a strong FDIC and deposit insurance fund are essential to the banking system. Banks stand ready to do whatever it takes to ensure the health of the fund and strength of the FDIC.
The FDIC is stronger than ever before. The FDIC insurance fund stood at an all-time high of $124.5 billion as of June 2022. The FDIC has a $100 billion line of credit with the U.S. Treasury, which by law, would need to be repaid by the banking industry if ever used. The banking industry is well capitalized.
Silicon Valley Bank is the first bank closure in this country in almost three years, a testament to the resiliency of America’s banks and their ability to support the economy and the communities they serve despite a global pandemic, rising inflation, and an unprecedented increase in interest rates.
Several unique factors converged at the same time to trigger the liquidity crisis at Silicon Valley Bank. Banks across the country do not face the same challenges that Silicon Valley Bank did. It had a unique business model largely focused on the tech sector.
Freedom Bank is Moving Forward
As I discussed in last week’s email, Freedom Bank remains well capitalized and well positioned to continue to serve our customers and community. We were chartered 22 years ago and expect to continue serving our clients and this community in a proactive and passionate manner.
We know that all customers are being more diligent in selecting their banking partner. I recapped all our financial strengths last week but wanted to also share the third-party validation of the strength of Freedom Bank. There are three companies that are primarily focused on providing bank safety ratings and research.
We are pleased to have received the highest rating available at each of these companies:
Bauer Financial – 5-Star Superior Rating
Veribanc, Inc. – Green 3-Star Rating
There has also been a lot of discussion in the media about differentiating a bank’s safety based upon their level of uninsured deposits. However, banks under $1.0 billion in total assets, like Freedom Bank, are not required to disclose this in their regulatory financial reports.
To ensure the most transparent posture, I want to supplement our disclosure and share that our bank’s estimated amount of uninsured deposits represent only 25% of our total $850 million in deposits on December 31, 2022. This is well below the industry average of approximately 40% and below many of the banks in the DC region as profiled in a Washington Business Journal article last week.
We have numerous core deposits less than the insured level of $250 thousand. We also utilize various deposit products with municipalities, brokered CDs, and IntraFi deposits structured in ICS or CDARS that meaningfully reduce the uninsured portion of our deposits over $250 thousand.
It is also worth noting that Freedom Financial Holdings Inc, the parent holding company of Freedom Bank, trades on the OTCQX (ticker symbol FDVA). While we are not an SEC registrant and do not trade on NASDAQ, this requires the highest level of disclosure of any of the over-the-counter equity markets.
As mentioned last week, our stock has performed very well over the past year. Last week, our stock was down 6.1% to $14.00 as compared to the KRE Index (SPDR S&P Regional Banking ETF) which declined over 10% last week. While our stock is not as liquid, it is an encouraging sign that we performed strongly relative to our peers.
For those customers who have questions about FDIC insurance coverage of your deposits, we are ready and prepared to assist you in identifying whether additional insurance coverage is necessary or appropriate in your situation. We have full access to the IntraFi platform of ICS and CDARs deposits that enable you to achieve the largest per-depositor and per-bank full FDIC insurance available through the reciprocal nature of the deposits.
One consequence of this market turmoil is a significant decline in term interest rates and a possible pause by the Federal Reserve on its path of increasing the Federal Funds Rate. The 10-year Treasury is yielding 3.45% this morning compared to 4.0% earlier in March. Furthermore, the yield curve remains inverted (shorter rates are higher than longer rates).
Freedom Bank has locked a significant number of residential mortgages last week as rates plunged. We are also actively talking to business customers who have floating rate commercial loans about possible interest rate swap structures that enable a reduction in current loan rates along with the certainly of having a fixed interest rate if inflation persists.
As a community bank customer, you have complete access to our experienced team, and we stand ready to assist you at all times with all of your banking needs. We take enormous pride in our relationship-based business model, which is focused on building long-term trust with our customers.
We are excited to host a Grand Opening celebration for our new Chantilly Branch and Mortgage Division office on Wednesday, March 22nd. I would be delighted to see you there and, as always, please reach out to me or your relationship manager if you have questions or if we may help in any way.
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