10 Lessons from SVB with Chris Nichols

Caleb:Well welcome everyone to another episode of the community event podcast I’m Caleb Steve they hear on a rainy Friday afternoon with Mr. Chris Nichols Chris you’re in town from San Francisco how are you doing
Chris: doing well doing well. it’s been a heck of a week it’s about to get even more interested in the weekend
Caleb: its been one of the most uneventful weeks in banking that I can imagine. It was very boring just pushed some papers sent some emails nothing really in the news so yeah pretty uneventful. You just came out with two blogs this week recapping this week in terms of SVB, silvergate can’t keep them all straight all the banks straight with this si signature for sure high level what’s your main take away everyone’s pontificated right now how do you what are your how do you pontificate
Chris: sure so many cross currents so many opinions out there and you know we are clearly another opinion but I would say since we lived this day-to-day and most bankers are familiar with these risks now they just get kind of realized and codified and I think you know the future is going to be how do we prepare how do we better prepare for what’s about to come and I do think we’re probably at the start of the of the crisis and I wouldn’t you know I don’t know how deep it’s going to go but I don’t think it’s over yet and I think this weekend will bring some news in the banks that the failed and then I think we’ll have some further issues going forward because clearly there’s stress in the system and we’ll see it I think the big the big first take away that you know the root cause here starts at least with Silicon Valley bank with interest rate risk overall and and as that manifests to liquidity risk as we saw so you have the best portfolio you know I think there’ll be a new paradigm and I think we’ll talk about this on a webinar about you know maybe what duration should be how liquid your security should be how you should hold these HTMS right now I think by and large banks have to consider reducing their portfolios taking some sales taking some gains if possible and even taking some losses in order to become more liquid and prepare for probably higher capital charges that are set to come down well one of the blondes you write you talk about 10 overlooked lessons you know we hear a lot about balance sheet management we hear a lot about some of the obvious takeaways from what’s happened over the past week but let’s talk about some of the lessons that you’ve written in this blog that maybe we’re not paying attention to but maybe you really did have an effect as well one of them you say is new ratios that we may need to pay attention to in the future what do you mean by new ratios in terms of you know securities capital capital requirements that kind of thing sure so really in the span of a day last Thursday when Silicon Valley bank had the run went into crisis you know bankers learned a bunch of new rations we learned that you learned deposit ratio which we thought was a good thing to be low and still come back was 43% may not be the whole story and so that ratio gets modified you have loads plus securities to deposits and I think that’s now kind of the new metric within that genre going forward if you know how to look at a bank I think the percentage of uninsured deposits is probably the second biggest one ever every analyst I’ve spoken with in the past week now kind of talks about that the relationship to the risk at banks overall funding capacity to uninsured deposits is another one how what your liquidity lines are worth how much are they how fast can you access them how stable are they are they get pulled if you have negative tangible equity and things like that I think that were important and then finally you know I think this industry is trending towards probably an adjustment to their capital or to one capital being adjusted for at least your AF S portfolio losses your AO CI and possibly your HTM mark to market as well
Caleb: well you mentioned that webinar on March 30th which is a Thursday we are planning a one hour webinar and Chris and some of our fixed income team members are going to break down a little more in depth now takeaways from the past couple of weeks and what it means for you and your community bank but let’s move on to the second trend that you talk about or the second lesson or take away and this one’s near and dear to my heart as a marketing guy who talked about the importance of brand and I hi Fred several articles over the past week talking about the PR side of this the communication side of this when you take a loss on your bond portfolio how do you communicate that to your depositors to your customers to your shareholders in a way that tells a positive story talk about how brand plays a role here
Chris: sure so I think you know as you looked at the tweets that happening on Thursday in particular you saw many customers many analysts many community leaders come to Silicon Valley banks rescue and support them still valley bank has and and you know first Republic bank for that matter as well those are two of some of the best brands in banking you know I think we’re in the top echelon of the industry and it helped unfortunately it didn’t save Silicon Valley bank but it definitely helped and I think you know any bank that’s not investing in their brand for a number of reasons is doing themselves a disservice and this is just another manifestation of that that as you build your brand one of the things it does is keep your deposits a little stickier so to speak make them less interest rate sensitive less safety sensitive and you know it can accrue deposit performance over time and I think that’s a good lesson to learn here
Caleb: You also talked about the impact of social media and you share a chart in this blog that I think is staggering about the tweets and their mentions of Silicon Valley bank on Twitter going from virtually not talked about at all on Twitter to one of the most trending topics in the whole Twitter verse talk about social media and its impact on deposits sure so I think one of the peculiarities of Silicon Valley bank is they have a customer base that’s highly concentrated not only high concentrate but made-up a bunch of type a personalities type a personalities that are on social media
Chris: So what you saw was this explosion of the conversation there that really resulted in more concern and that those few venture capitalists just controlled a large number of portfolio companies and a large number of a large amount of influence throughout the venture capital community until you saw the the communications spread like wildfire through social media now you’ve seen that in a bunch of other banks and my point here is that most banks you know their customers could tweet and be concerned about their tier one capital ratios and liquidity and she posits etcetera and no one would care here it matters and so I think it’s a double edged sword but I think that as you know you work on social media you build your brand and I think one of the things you have to assess is your customer concentration their use of social media and then adjust your deposit duration and your deposit life accordingly
Caleb: The next lesson has to do with investment portfolio sales and restructuring to support capital and you say in your blog the immediate tactic for many banks will be to use the drop in rates to reduce their investment got hurt
Chris: sure so the bigger picture is I think all banks have a natural liability structure we don’t have a lot of depositors a lot of savers that are looking for 1020 year type money most of our savers have just excess operating cash whether it’s for household or scale business or mid size company and so there’s a certain natural duration to our liabilities particular not much you can do to change that you can get inventive and create some different products and maybe it’s a you know HSBC savings account maybe it’s 401K all that helps extend duration and performance of liabilities but you can’t change it too much you know the average checking account or savings account is what it is and so that’s where you start and that varies depending on your customer base and location but you start there and then you start to say OK what kind of loans do I want to be making and you create a loan portfolio so we have this product to now take a long term fixed rate loan make that shorter and so that you can make that should match your liabilities and then last the third piece is okay recreate your bond portfolio match lending side natural posits and so that’s kind of the missing piece and we moved away from that as an industry over the past 20 years it used to be all shorter term treasuries and first got into banking and now you know we stretched for yield a little bit so I think you’ll see more of a return towards a high towards liquidity and eye towards a shorter duration securities and there’s arguments to be made you know both ways about how much to rely on we’ll talk about that in the 30th webinar but I think right now is a good time to at least reassess the structure of your investment portfolio possibly take some gains or get out of your securities to become more liquid because you’re not sure where this crisis is going to be

Caleb: Well one of the big developments is the new funding program that is well talk about just for word of mouth I haven’t yet so the bank term funding program you know was introduced over the last weekend
Chris: I think it’s a fairly new concept that is being used the other day and I think you can use it without stigma so lots of question we normally get yeah I think the terms are favorable and so we’ll step through it again on the webinar and talk about kind of nuances you know if you’re going to use that facility your names are going to come out for some time and I don’t think you’re going to get any more regulatory scrutiny than you a couple of questions concerned about your use of wholesale funding but by and large I think it’s kind of a free pass for bankers and it’s probably the first place to go particularly if you have securities that are underwater and you want to borrow against them you can basically borrow against the face value of car value of your securities so even if you have a 20% or 10% loss you can still borrow against that 10 or 20%
Caleb: Let’s talk about positive inflows clear a lot about deposit outflows running on banks built Utah also about the impact of deposit inflows what does that mean for banks right now
Chris: so it used to be a well worn tactic as your bank right into trouble usually we’re talking credit but as you run into trouble over credit you would lose some depositors as that hit the headline or was the talk of the community but by and large you could also counter market counter program and bring in new deposits and there’s always you know that was mostly overlooked at any bank run that previously took place over you know next month etcetera and you know there are biggest failure to date wamu you know we saw $8 billion run out over three days and that is just a so we come to like banks 42 billion that ran out and basically a little over 4 hours you know basically $1,000,000 a second so you no longer have the ability particularly in the age of social media particularly in the name and the age of you know electronic transfers deposits online mobile banking where you can access your wires so things are moving a lot faster and So what used to be a tactic of as you’re failing to be able to raise deposits to slow and buy yourself more time I don’t think bankers can count on that anymore
Caleb: talk about the lobbying aspect of this is one of the things that folks are probably going to be paying more attention to
Chris: well that’s kind of $1,000,000 question about what happens from here in terms of uninsured deposits and if you look at you know what’s happening with some banks out there particularly some of the California banks where you have you know talk on social media you have a concerted effort of short sellers you have a number of things and you know every deposit has to question themselves why are they out of community bank and you’re over over the $250,000 FDIC and I think that’s a real question going forward about what happens and so my guess is you’ll see more of a lot of the efforts for higher Deposit Insurance coverage and or you’ll see dividend insurance you’ll see the rise of of products become more popular and many banks will now go back to reciprocal deposit you know into five type of structure and there’s a couple other companies that offer that out there or the deposit account backed by treasury bonds that you could borrow against through you know your debit card or through a line or you know maybe sweep that was popular at one point in time and you know Silicon Valley often used to move some of their excess deposits on to money market accounts or maybe it’s a treasury bill account or something like that you’ll see more of these echaniz going while you see banks step up the lobbying efforts to get more coverage I think that will happen both on the national level and on the state level I think you’re Massachusetts is looking pretty smart right now as they have state coverage above the FDIC limit and so I think you’ll see that probably in more states
Caleb: What do you see on the horizon in terms of composite rates obviously the upward moving rates is putting pressure on deposit betas cost of funding that’s been the talk of the town lately but how does this potentially change things
Chris: Sure this is just one person’s opinion you know I think betas relax a little bit interest rate sensitivity relax a little bit you know there’s an argument to be said that people will be marketing more on rate to raise deposits and so I fully agree that could be a possibility my guess is that I think safety becomes more of a concern I think paying a higher rate is probably counterintuitive singular at least a single in this new market that maybe you’re in trouble and you need deposits badly and so you may not want to be out there marketing the high rate right now and I think the right competition you’ll see that relax over time you’ll see more marketing on safety more marketing and convenience more marketing on brand hopefully more new products and so I think you’ll see less rate competition plus I think you’ll see the Fed at least slow the rate hikes and maybe pause that combination I think we slow the beta increases the marketplace
Caleb:well there’s two more takeaways we have the cover and again folks all of this is in Chris’s most recent blogs head to our website South state correspondent.com to get that great information to blogs at Chris’s written the second to last lesson that I’d love to cover with Chris is when you talk about customer concentrations we hear a lot about concentration in the loan portfolio and risk there but it would be not as much on the deposit side we’ll talk about why that
Chris:yeah so I think banks have to become more marketing efforts and how they go after different customer segments just like your deposits as you look at deposits of even particular customer segments each customer saying that has a certain duration has a certain volume and chance to deposit volume and and you know depending on how your bank set up you may want to target certain types of organizations certain customer segments in order to bring in those types of deposits that you need you know if you’re going after municipal deposits that may be a little tough these days just because they’re more a a more interest rate sensitive and be they require collateral that’s now probably needed so maybe that’s not the best market but maybe trade associations with a nice long deposit life to end duration low interest rates sensitivity and so that’s one you know funeral homes we’ll do a blog on the number and the different types of industries that have a lots of deposit volume and B have above average deposit performance and I think you’ll see more marketing around that I think your customer concentrations matter as Silicon Valley pointed out you know under underscored for the industry and I think that just has to be more more of a focus school forward and I think it pertains to some of these rural community banks as well where community members do talk quickly and while it’s probably not in the crosshairs in terms of social media highlights it’s still susceptible to your bank right or at least you know the positive pulling out some of their money and putting in another alright Caleb: Well the last take away lesson that you mentioned is the importance of managing your customers as part of your crisis plan certainly a crisis communication plan is not for any of our banks having gone through COVID just a couple years ago we talked about what do you mean when you talk about managing customers with the crisis communication
Chris: I think I’d ask every banker that’s listening to this podcast just think back how they handled that weekend last week and in particular when Silicon Valley bank failed and it’s your bank failed we had the history of silvergate in the near rearview mirror and so you had you know three failures and you know what it meant and there was a point in time where we thought on Saturday or Sunday we were going to have an assumption of Silicon Valley bank we could get back to normal we didn’t have that we had the turn funding program announced and there was a point in time before that that program was announced that we actually didn’t know what was going to happen to any of our banks on Monday and that you had to be apparent sometime on Sunday and so I asked each voucher kind of think back how they handle both either employees and B their customers or how they plan to talk to their customers you know and if you did your job right as a proactive banker you hopefully called the meeting that weekend or that Friday night had some preparation got some reports you know we’re prepared to look at your deposit flows on hourly basis and had a war room maybe established for Monday morning you had a customer communication plan and some banks served to call customers on Sunday to calm them down whatever it was I just think that this underscores the need for a rapid action force within management to be proactive both communicating to your employees and communicating to your customers and as I called around on Sunday to some banks I think they were caught on the heels and worn as proactive as probably should have been so that’s what I’d love to see our industry get more straight and I wasn’t sure until that day
Caleb: well this episode is being recorded on a Friday it drops on a Monday so Chris let’s hope nothing breaks over the weekend or this contents going to be dated in the shell fives already expired so we appreciate you all listening today Chris if folks want to get your blog follow you on social media
Chris: absolutely well we’ll put in the links we’d love to have you subscribe to the blog also on Twitter on on LinkedIn in particular and would love to hear bankers opinions as well and hopefully we’ll go more in depth we’ll have some fixed income specialist we’ll talk about so we’ll talk about the economy inflation the potential stagflation how this affects kind of budgeting and planning going forward now some banks have to recast their budgets the trends and I think the regulatory wins will have will talk about earnings hits for the rest of the year and what happen what’s going to happen next year gonna be action packed webinar will be on the blog over the next couple of weeks with that webinar is a good chance to kind of get an update on the situation
Caleb:it’s an evolving situation so we want to be out in front of it as much as we can providing content that creates value for you the community bankers so thank you all for joining us.