The Opportunity of this Banking Crisis (Highlights from Our Recent Webinar)

This is the community bank podcast well hello and welcome to the community bank podcast thanks for joining the conversation today I’m Caleb Stevens and we’re glad you’re here for today’s podcast today we are going to be highlighting some snippets from our recent webinar called the opportunity of this banking crisis last month just a couple weeks ago actually we had Chris Nichols Tom Fitzgerald and SJ guzzo from our correspondent division recap and economic update talk about opportunities coming out of their recent banking turmoil what it means for the investment portfolio and we want to play just a couple snippets from that webinar featuring Chris Nichols and SJ guzzo talking about what banks need to be thinking about when it comes to deposits pricing your investment portfolio if you want to see the full webinar just head on over to our website South state correspondent.com or you can e-mail me caleb.stevens@southstatebank.com I’ll be happy to send you a copy of the replay as well as some slides Tom Fitzgerald also does a great economic recap but if you don’t have the slide deck it’s a little hard to follow just in the podcast format and so if you want to get that as well um shoot me an e-mail I’m happy to send you his slides and also happy to send you the full recording before we get there we’ve talked about it a couple of weeks now on this show but we would love to see you this summer July 6th through the 9th at the Ritz Carlton Amelia Island for our annual bank management conference our annual bank management conference is all about helping you become a better banker for your organization we’re going to talk about leadership we’re going to talk about marketing culture strategy the investment portfolio deposit pricing all the things that you need to be better equipped to run your bank in today’s environment we’re also going to hear from Kirk cousins quarterback for the Minnesota Vikings and best of all I think is that your families are invited bring your kids bring your spouse we want to see everyone there make memories at the beach this summer while also improving your skills knowledge and overall ability to run your bank so to view the agenda for the conference and to register all you have to do is click the link in the show notes of this episode or you can visit S state correspondent.com/BMC 2023 that’s S state correspondent.com/BMC 2023 and now I hope you enjoy some highlights from our recent webinar preciate everyone’s time want to walk through really six ideas some of which you’ve heard before some of which are new some of which you really maybe heard but haven’t fully comprehended and I don’t I just as we think through with these crisis I wanna just highlight a couple things and so the first I think you’re all all all aware of it’s tracking metrics so one thing that’s banking current quote UN quote banking crisis has taught us is getting better at tracking uninsured deposits uninsured deposits to your liquidity lines and then a common tier common equity tier one type capital ratio with your mark to market your AOC I deducted and possibly your HTM mark to market on your portfolio deducted look at that out of capital so those those three are kind of the new metrics that we know analysts and investors and even regulators are looking at and so I just think that we need to look at that on an ongoing basis and prepare for more pressure to come now part and parcel with that is managing liquidity so that I think is the second item getting better at managing equity it’s now more of an art form that a science almost we have the FHLB the Fed discount window your wholesale lines we also have the new bank term funding program and so all that merits the conversation so step one there is to look at a daily balance of deposits loans cash in a wholesale funding and monitor what’s happening with particular deposits so as we call around to many community banks and even large banks there is some runoff in the system most of it is interest rate related money going to treasuries money going to money market funds money going into other investment part of investments but I think it merits a conversation as much eyes as much resources as you can muster on figuring out why those funds are leaving and you know in some cases it is safety in other cases usually for a smaller community bank it’s not and it’s interest rate rate related but getting a handle on that I think is it’s prudent management overall and then one thing that we found as we talked to banks most banks don’t have their full loans pledged particularly do they have to pay HB and particularly in the construction category so I think it’s worth everyone’s effort to go back and look at in order to increase that ratio of uninsured deposits and putting lines looking back and seeing what other loans play going through those clean those up see if you can pledge more that also merits a conversation we think with on your workflow as you on board loans and your loan OPS team to be able to flag these loans right from the start so you don’t have to go back and clear these up but that would be another tip when it comes to managing lines uh we find that most community banks have maybe a 10% limit that was kind of the rule of thumb three crisis to what your maximum wholesale funding or your your maximum appropriate CD level should be and so I think that probably needs to be increased we’re encouraging banks to maybe take that to 15% right below that next FDIC premium tier which we think is a safe because you wouldn’t want to be constrained by policies at the last minute should you need it and as we learned with SBA money runs out you know getting the previous record was $8 billion / 3 days for Washington mutual we still have Silicon Valley bank 42 billion and just a touch over 4 that’s a new level of liquidity outflow that none of us I think are used to and it could happen to really any bank granted there is somewhat of a special case but not a full special case and so when you go down the list and you see what’s happening in some other banks you start to get a little worried you start to know that the equity management and speed the liquidity really really that it brings up the whole World Bank home loan bank most banks get about 35% haircut with the current market market and exceptions and you know other requirements and so that is not as good as say the Fed discount window which is more lenient but the home loans easier to use doesn’t have the quote UN quote stigma attached to it and so I think it merits internal discussion about when you use the bank term funding program when you use that HB when you use discount primary window and know how you’re going to waterfall your liquidity when it comes to the new bank term funding facility that is your cheapest option and to the extent that you have a negative mark to market in your bond portfolio security portfolio you’d wanna use that first and foremost if you just have a small market may not be worth the hassle moving bonds or securities over to it and also merits now with these ratios on everyone’s mind how do you actually manage those ratios and so the current thinking is you know you’ll have all these securities pledged and then you may bring them back on your balance sheet but then quarter end etcetera to increase your basically securities on hand and so that I think merits a conversation with your finance group and your accounts and your professionals to figure out what to do there but that is kind of the new best practice #3 setting objectives so overall I think it’s really really important in this particular time of stress that we’re clear on our objectives with our management team with our board with people and with our you know partners vendors etcetera in terms of is it growth is it profitability are you just trying to survive and in many many cases where we find is instead of continuing your size or growing as you might have done in the past last year for example it’s probably best to shrink a little bit particularly your higher rate higher rate sensitive customers let them run off and be content with not growing and so across the board as we visit banks we see problems with compensation plans that are based on deposits we see issues with incentive structures or or or you know vision of management as it filters down and I think now is the time to be really really clear so we encourage management teams and boards to get their thinking straight and communicate that company wide because I think it really matters in this day and age and you have to put liquidity above almost profitability just in case this crisis gets worse and you have to play more defense number four taking another look at interest rate risk across the board what we saw you know many of us didn’t give credence in the industry to the mark to market invest portfolio and that same mark to marketing your best portfolio is of course taking place in your loans even to a much greater extent and it still matters overall that is still risk and what are you think it’s gonna be monetized or realized as requested because many of us thought that our investment portfolio wouldn’t be realized monetized and that wasn’t really the case and so kind of the way to think about it at least in our framework is you haven’t you know try your best to do whatever you can to deposits your deposit performance right then figure out what loans what your interest rate risk you can take on your lending side and shorten that we use the arc program to shorten our duration on the lending side plus manage credit risk which we’ll talk about in a second but match your lending side to your deposits because then figure out what kind of cash balances you need to keep and after that then figure out how to manage your investment portfolio and with more investment advice we’ll turn it over to SJ in a couple of minutes here but that’s kind of the way to thinking I think it’s just interest rate risk in general we’re not sure what the fed’s going to do we’ll let Tom talk about that a little bit but I think you have to be prepared for a rate increase rate rate decrease over the next five years and so maybe and maybe recession and so that merits I think moving to a more neutral stance not taking a right view and managing your IR risk or your interest rate risk according five that brings up probably the big one what I think should be on the top of everyone’s list as a company wide initiative and that is the deposit gathering we’re still shocked that many firms don’t have a chief deposit officer and it’s a full time job managing deposits it’s not probably left up to retail or French structure you have a loan committee you have a chief loan lending officer chief credit officer many banks overlook probably the most important function in the bank right now and when you consider the spread of your current cost of funds to wholesale funding and a makes eminent sense to hire a chief deposit officer it also makes sense as you’re trying to approve or figure out how to justify online deposit opening for both retail and commercial onboarding steps and marketing many many new technology issues now make sense in light of the spread between wholesale funding and and your current cost of funds and how fast your current cost of funds is likely moving up how much your bait is increasing over time and so we kind of take take a look and dust off some old projects that might have brought in deposits treasury management as we called around the banks not enough we don’t think in our opinion in my opinion at least banks are not investing in their treasury management platform enough and not investing in sales people for the treasury management so that is a I think a gap in our industry we’re not offensive enough we don’t spend enough time marketing our treasury management I believe the future for liquidity and for bank performance is in liquidity management so huge fans on increasing that whether it’s adding more data more intelligence there AI whether it’s more functionality better usability working with your core working with your provider to increase that and to make that more usable I think is worth every penny there’s many new products that probably need to be dusted old products that probably need to be dusted off for new products the idea is to lock in make your deposits more sticky so you know whether you bring back a Christmas account whether you bring back or whether you use a kind of a roundup savings program whether it’s a goal oriented savings account I would get more creative across the board and a marketing to particular customer niches so published yesterday kind of our top 15 industries of what we think were the major deposit slide so as you mark to a customer while you’d like to treat every customer the same that’s not really the reality and some are more deposit rich than others so if you’re going to go after deposit you might as well go after insurance companies hospitals and we have a whole lot longer list top 20 on our blogs we’ll check that out but going after customer segment and then creating products whether it’s payments or some of the products that I already mentioned I’m going after products to lock in more deposits that I think should be prioritized overall as products become more important and then finally I think it’s more emphasis on generalized credit risk if you look at most downturns they are preceded by a about of illiquidity or liquidity shock whether it’s long term capital bank or a number of others you can look at that and so this could be our liquidity shop that is a harbinger of more credit risk so office is an obvious one but I think I would take another look at off your loan loss allowance on your monitoring etcetera and I would pay particular attention I would like to recommend particular attention to those loans that are coming due from maturity and instead of just looking at that six months out start to look at that 18 months out and I will add its maturity and it’s also those that are having a great reset they’re gonna reset up to make sure there’s sufficient cash flow coverage to handle those loans but I think I would move that target out to 18 months start to get ahead of that and have those conversations with those borrowers and if I couldn’t really refinance structure those that’s exactly what I do to head off a lot of forthcoming credit risk because I do think that that’s going to be an issue with that I think it merits that’s kind of on the bank performance side and the lending side and the deposit side for the investment side let me turn it over to SJ to give you some ideas on what’s happening in the market and maybe I’d better look at your investment portfolio with the terms in terms of a higher liquidity higher performance as Jack you know the the events of the last couple of weeks obviously have given the focus on on the issues that took place it’s brought the investment portfolio directly into into focus here so I think as we as we look at it we we we try to assess what that impact is the one thing that we can be sure of is it’s still very early in the process but I think the focus will be on liquidity and safety as we go forward the Fed chairman said just earlier this week he said you know regulation will merit serious attention particularly for capital liquidity and interest rate risk and that’ll include capital treatment associated with unrealized losses and security portfolios so as it relates to the portfolio the first thing I’d say and we all I think have been down this path the last couple of weeks it’s an if if you have a liquidity issue it’s important to deal with it and probably important to deal with it sooner rather than later so the first thing I’d say is you know look through the portfolio if you can find things at gains you use them for liquidity obvious answer but I think the reality is it’s tough to find gains in the portfolios the these by if you remember what we went through it was COVID and stimulus lower rates and then inflation and tightening so any of those bonds to the extent any of those bonds were bought during stimulus which we’ve we’ve rallied sure we’ve rallied but we haven’t rallied enough to to put enough gains in the portfolios generally to to make much of a difference but if they’re there take advantage of them call your coverage get bids on those bonds and and see if they can help any liquidity issues that might exist I had a slide but I’m not going to attempt fate and try to put it up so we’re just going to move through that and Chris had mentioned the the other two options obviously the potential um negative connotations associated with that and you have to do what’s best for your institution we have fielded a few calls from folks asking about the securities that were pluggable to the BT FP the securities that might be pluggable at the discount window we’ve helped a few folks get the move securities over um so if you have any questions ask us let us know we’re happy to help wherever we can and and then and then I think you know the next step is what other takeaways can we get from SVD and what might be the longer term impact of of the events of the last couple of weeks well we know unrealized losses are under a microscope so you know anything that we can do to manage the current level of unrealized losses in the portfolio I think it’s going to be important as we move forward and as we get into you know the next exams and and the next cycle so umm and then the second part of that is minimizing those losses as we go forward so you know TomTom is is is going to mention I think shortly what his expectations are about where where interest rates might go through the end of 23 and then into 24 so not to steal any of that under but if you get an opportunity to to take out any of these bonds that are currently at losses you need to be you need to take advantage of that and I think that’s obvious as well but but we may find ourselves where you know some of those securities end up at break even or close to it or maybe above so if we get there obviously taking advantage of of those sale opportunities is going to be and then the other piece of this is is how do we deal with with unrealized losses as we go forward I think one of the things that has been thrown around is including the unrealized losses in HTML in some of the capital calculations that take place and and obviously that’ll that’ll change the nature of those capital calculations and there’s conversations articles you hear it on CNBC all the time but but there’s there’s conversations about what the impact of doing that might be and and I think there will be some some surprising and kind of eye opening results when when we do that but I think that That sort of if if that does bring about an A new capital regime I think that’ll be a gradual change and there’ll be an opportunity to kind of leg into it but it does mean that as we go forward we need to have that that that interest rate risk issue kind of front and center because I think the regulators are going to be are going to be very focused on that going forward there’ll be a premium on liquidity and safety shorter might probably be better interest rate risk management will be the focus so we might even see some of the stress testing that we’ve all you know we’ve seen the big banks have to do we may see some of that stress testing kind of make its way down to the mid size regionals and then even some of the community banks so all of that the jury is kind of out on all of that and where where the regulators may end up with that process so you know it it it it feels very early to make some of those predictions uh but what we do know is that all of this is in focus and I think the regulators are going to be serious about what the what the the impact of this is umm one other thing to consider I think as you think about moving forward with the investment portfolio is risk weightings and and how you might manage that so um you know the the zero percent the 20% risk weighted securities will probably be viewed more favorably along with shorter duration versus longer duration so I think those are the considerations as we go forward and those are going to obviously perform better under any of the stress scenarios and I think that may be what the what the regulators are looking for but but obviously shorter and floating yeah it it comes with a cost and that’s going to be the question and that’s going to be the issue I don’t think the regulators necessarily are going to be focused on what the cost is going to be but but that will obviously squeeze the net interest margin funding costs have gone up to the extent that portfolio yields go down as a result of this uh it’s going to squeeze margins so it’ll be a balancing act to determine what the what the portfolio response has to be to to you know changing rates and the new maybe a new stress scenario and what what expectations might be going forward from the regulators we’ll understand more with time right now I don’t think there’s there’s really enough information out there we’re still navigating this this this situation this crisis so as you think about your your liquidity going forward I think it’s important to keep some of those concepts in mind shorter maybe floating risk weightings things along those lines and then I I I think it’s important to you know to ask your advisors and your coverage what those what the implications of that might be and what bonds might might fill those needs