Damage to nonprofits from this week’s banking crisis appears limited so far, but charity leaders and experts worry about ripple effects that could hit many organizations.
“This is a systemic disruption, and it will most certainly have an impact on our industry and nonprofits generally,” said Christina Travers, chief financial officer of LISC, a national community-development organization.
Financial intermediaries like LISC, the Nonprofit Finance Fund, and the Opportunity Finance Network are surveying groups and assessing potential fallout from the failure of Silicon Valley Bank last week and the New York-based Signature Bank on Sunday. It’s not clear how many organizations have deposits or loans with the banks or have benefited from their philanthropic funding.
“We want to stand in the ready regardless of the backstop that the federal government is providing,” said Nonprofit Finance Fund CEO Aisha Benson.
Organizations taking the biggest hits include affordable housing groups in California and Massachusetts, where Silicon Valley Bank was a major player in the development of homes for low-income families. At the start of the year, the bank had contractual commitments of more than $750 million to affordable-housing projects, according to its federal filings.
In Massachusetts, the bank was also involved in residential mortgages, income-based subsidized mortgages, and first-time home-owner programs, said Kevin Murray, interim executive director of the Massachusetts Association of Community Development Corporations.
“There’s a lot of confusion: We are still not clear about what exactly is the scale of the problem,” Murray added.
Nationally, the implosion of the two regional banks raised fears that others might collapse. Stocks of several banks plummeted on Monday, including San Francisco’s First Republic, whose share value dropped 62 percent. Moody’s Investors Services described a “rapidly deteriorating operating environment” for the banking industry in a report and said it would review six banks for potential credit downgrades.
Regional banks are often key lenders and grant makers for small and midsize local organizations, which sometimes receive favorable loan rates and grants. Some groups reacted to news reports by emptying their accounts. “It’s already happening,” said Benson of the Nonprofit Finance Fund. “People are moving their money,” although the stocks of First Republic and others regained some lost ground on Tuesday. “It’s hard to know what to do,” Benson added, but groups that operate with small cash reserves may feel compelled to switch banks.
If financial pressures continue, regional banks may reduce their grant making and philanthropic work, observers cautioned. “Things that are often considered discretionary expenditures will be under very close review or curtailed altogether,” said Randell Leach, CEO of Beneficial State Bank, an Oakland, Calif., community bank and B Corporation founded by philanthropists Kat Taylor and Tom Steyer. “That’s potential fallout for nonprofits.”
From 2010 through 2021, Signature Bank made more than 7,200 grants totaling almost $25 million, according to a company report. Silicon Valley Bank’s foundation gave away nearly $10 million in the five years from 2016 to 2020, according to its tax filings.
Silicon Valley Bank gave more than $200,000 last year to Build.org, a Bay Area group that aims to improve career and entrepreneurship skills of students in underserved communities nationally. The group was working with the bank to develop a larger, multi-year grant, but that’s “in jeopardy now or likely off the table entirely,” said development director Ed Wilson.
Wilson said the bank was a model corporate citizen. Its leaders and staff have worked closely with the organization for some two decades as mentors to students, volunteers, and board members. “You couldn’t ask for better partners,” Wilson said.
Benefits of the Local Bank
Finance experts suggest nonprofits move to protect their deposits. But groups shouldn’t expect to uncover signs of a fatal weakness by studying a bank’s loan portfolio or rating. “We’re not qualified to do that,” said Kate Barr, CEO of Propel Nonprofits, a community-development finance institution. “It’s like trying to second guess a cardiologist’s diagnosis.”
Nor should groups reflexively move their money to major national banks. “One of the benefits that many nonprofits have working with a smaller regional bank is the relationship,” said Barr, a former bank executive. Nonprofits leaders can get to know their bankers personally. “When you get into small, rural towns, it’s often the president of the bank that you know.”
Those relationships can prove pivotal in getting favorable loans and credit when times are tough — particularly if lenders themselves are squeezed. “If banks don’t know you and things start to go south, lines of credit just get pulled,” said Demetris Giannoulias, CEO of Spring Bank, a community-development institution and B Corporation in New York. Many nonprofits lost credit lines during the early days of the Great Recession, Giannoulias added.
Giannoulias and others urge nonprofits to make the best use possible of Federal Deposit Insurance Corporation protection against bank default. It backstops individual account assets up to $250,000.
Some banks allow clients to purchase additional insurance. Others have “sweep” programs in which funds above $250,000 are moved temporarily to other banks or money-market funds where they retain FDIC protection.
Organizations should work with their banker to identify cash that won’t get FDIC coverage, said Marcie Bomberg-Montoya, leader of strategic advisory services at Wipfli, a consultancy that works with more than 2,000 nonprofits. If a bank doesn’t have a means to protect that additional money, nonprofits can move some to other banks.
“I’m not an advocate for having all your eggs in one basket,” she added. “It’s more difficult to manage, but it’s really your best risk-mitigation strategy.”
Similarly, the bank failures suggest nonprofits should have a good mix of grant-making partners. The tech industry that Build.org leans on is getting hammered, says development director Wilson, and the closure of Silicon Valley Bank — which had concentrated business with tech startups — means available funds will be even more limited.
Silicon Valley nonprofits “have to be able to diversify funding beyond financial services and tech,” he added.
Panic in Silicon Valley
The Biden administration’s intervention to guarantee deposits at Silicon Valley and Signature banks came after several days of havoc and panic for charities with ties to the institutions. Sunnyvale Community Services, a local safety-net organization, has a $5 million renovation loan with the Silicon Valley Bank along with $1 million in reserves as part of the mortgage agreement. The group’s board members spent the weekend worried that they would lose most of that money and be forced to repay the mortgage immediately.
“If they had called the mortgage, we would not have been solvent,” said executive director Marie Bernard.
Several affordable-housing groups are in a costly limbo despite the federal action. The Kelsey Civic Center, a 112-unit project in San Francisco developed over three years, was to begin construction this week. But Silicon Valley Bank shuttered on Friday, the same day it was to finalize a $52 million deal behind the development. “SVB, our $52M lender, was no more,” wrote Kelsey co-founder Micaela Connery in a tweet.
“We are exploring alternative financing options,” said Kate Peterson, a spokeswoman for Mercy Housing, the Kelsey’s development partner, in an email. “We are confident the project will move forward given our financial strength and lenders’ commitment to affordable housing,”
Other groups may face similar delays, said Noni Ramos, CEO of the Housing Trust Silicon Valley. The trust is working to provide bridge and gap loans and other assistance. Silicon Valley Bank’s community-development team “has been really extraordinary and a leader in the field in the Bay Area,” Ramos said. “There’s no contingency plan for a bank closure like this. It’s unprecedented.”
In the short run, affordable-housing developers are hoping that the federal government or a new owner of Silicon Valley Bank will honor the loan commitments they hold. In Massachusetts, groups also are reckoning with the fact that their communities will suffer because they lost a key player in providing low-cost homes.
“This was a community-development partner, not just a lending institution,” said Murray of the state association of affordable housing developers. “There’s a huge hole in that infrastructure now. People are just realizing the extent of it.”
