Community banks tie their success to the success of their communities

It is a truism, but the failures of Silicon Valley Bank on March 10 and Signature Bank two days later severely impacted the U.S. economy. By most estimates, Silicon Valley Bank’s demise was the third-largest failure in U.S. history, overshadowed only by Washington Mutual Bank in 2008 and First Republic Bank on May 1 of this year.

So are bank failures trending? According to data collected by the Federal Deposit Insurance Corp., bank failures have steadily declined in numbers in recent years. Since 2001, there have been a total of 564 failures. The majority of these failures occurred during the financial crisis of 2007-08 and the subsequent Great Recession; 157 banks collapsed in 2010 alone. Since 2019, however, there have only been 12 bank failures.

But focusing on the number of bank failures alone can be deceiving.

Consider this: The assets at the 12 banks that failed in 2019 equaled approximately $549 billion. From 2001 through 2018, the assets held by all of the banks that failed equaled approximately $720 billion dollars. Let that sink in. Although bank failures are getting less common, they are having an increased economic impact.

So how are depositors reacting? According to data collected by the FDIC and processed by PolEcon Research, deposits on average in the U.S. have predictably fallen. Interestingly however, deposits on average have actually increased at the 19 banks headquartered in New Hampshire.

From the fourth quarter of 2022 to the first quarter of 2023, a period capturing the Silicon Valley and Signature Bank failures, deposits fell on average by 2.46% nationally, whereas deposits increased by 0.4% at New Hampshire banks.

For U.S. banks with assets lower than $1 billion, deposits fell at a rate of 1.81%, whereas they increased in New Hampshire at a rate of 2.6%. The only category of banks in New Hampshire that saw a decrease in deposits during the enumerated time period were banks with assets greater than $1 billion in 2019, which fell at a rate of 0.9%, although deposits at the same category of banks fell nationally at a rate of 2.49%.

Depositors apparently have confidence in New Hampshire banks. But are depositors trusting New Hampshire banks misguided? No, quite the opposite.

Community banks, like the 19 headquartered in New Hampshire, necessarily tie their success to the success of the communities they operate in. For example, assets at community banks are typically largely in the form of loans to local organizations and individuals.

In comparison, as economist Brian Gottlob points out, more than half of Silicon Valley Bank’s assets were in securities — the majority of which were in debt instruments of the U.S. Treasury, or in government-issued, mortgage-backed securities. This is an important distinction for two reasons:

• Typically, the asset portfolio at community banks creates sufficient liquidity in cash, or at least other assets that can be easily converted into cash, creating a dynamic bank.

• Such an asset portfolio necessarily leads to increased investment in the community in which the depositors live.

So what is the takeaway? Depositors at New Hampshire banks are not misguided; they clearly care about their local economy, and think that their banks are doing a good job at stimulating their communities. The “New Hampshire Advantage” usually refers to the fact that New Hampshire lacks a sales tax. People might consider using the phrase to refer to New Hampshire’s banks, too.

Attorney William Callif is a member of Devine Millimet’s Corporate Practice as well as its Merger and Acquisitions team and represents clients in a variety of business matters.