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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 1: I'm Joe Wisenthal and.

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Speaker 2: I'm Tracy Alloway.

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Speaker 1: Tracy, it's been about, I guess three months or so

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Speaker 1: since the s V blow up, and I don't know people,

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Speaker 1: it sort of seems like a thing of the past.

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Speaker 3: Now.

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Speaker 2: I'm trying to remember when I went on vacation, but

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Speaker 2: I guess it was March. So yeah, yeah, I guess

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Speaker 2: three months. Can I ask before we start this conversation,

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Speaker 2: are we going to call it a crisis or not?

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Speaker 2: Because that seems to be a new terminology debate.

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Speaker 1: Well, yeah, it's a good question. I'm team anti crisis.

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Speaker 1: But also, I remember you were on vacation and I

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Speaker 1: remember You're like, oh, got a missing a financial crisis,

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Speaker 1: and I was like, no, no, it's not a crisis.

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Speaker 4: Enjoy your vacation. It's not worth like.

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Speaker 2: It was still the most interesting thing to have happened

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Speaker 2: to banks in me, it was very interesting. All right, Well,

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Speaker 2: let's let's agree to call it drama. Drama drama that works,

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Speaker 2: that works for everyone.

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Speaker 4: It was drama. I think that's right.

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Speaker 1: And you know, after that, we you know, there were

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Speaker 1: all these questions like why do we have thousands?

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Speaker 2: Why do we have banks at all?

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Speaker 4: But we did? We hit like an episode, So why

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Speaker 4: do we have private banks?

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Speaker 2: Oh that's true?

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Speaker 4: Yeah we did.

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Speaker 1: Yeah, why do we have private banks? Especially if the

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Speaker 1: depositors can almost always be guaranteed to be bailed out?

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Speaker 3: Yes?

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Speaker 2: So it did raise some existential questions for banks, and

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Speaker 2: one of them was the deposit insurance question that you

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Speaker 2: just mentioned. But the other one was the nature or

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Speaker 2: the breadth of the US banking system altogether. And this

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Speaker 2: is something that I think comes up after almost every

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Speaker 2: about banking drama slash crisis. You saw in the savings

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Speaker 2: and loan crisis. Certainly after two thousand and eight, there

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Speaker 2: was a lot of discussion about what should banks be doing.

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Speaker 2: Do we need this many banks? Or are we comfortable

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Speaker 2: maybe with merging some of them, consolidating them into megabanks.

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Speaker 2: And now fast forward to twenty twenty three, a lot

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Speaker 2: of that consolidation is happening again, and we are seeing

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Speaker 2: some of these same questions raised.

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Speaker 1: Right, And I guess there's like this sort of two

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Speaker 1: ways of talking about consolidation. One is like, could we

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Speaker 1: see the giant banks just sort of like buy everyone else?

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Speaker 1: And then we sort of have like a Canada style

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Speaker 1: banking system where there's like eight banks whatever, or could

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Speaker 1: it be like from the depositor perspective where they're just like,

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Speaker 1: why wouldn't I just put my money at JP Morgan,

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Speaker 1: the ultimate too big to fail bank? And then I

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Speaker 1: sleep at night and you know, and just why not?

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Speaker 3: Right?

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Speaker 1: And they have a good website and it works and

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Speaker 1: all that stuff, and so there's just like it feels

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Speaker 1: like there's all these forces put a lot of stress

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Speaker 1: on the thousands and thousands of smaller community and regional

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Speaker 1: banks out there.

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Speaker 2: Yeah, And at the same time, you know, this idea

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Speaker 2: of small local banks is kind of embedded in American psyche.

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Speaker 2: I feel like, certainly, going back to It's a wonderful life,

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Speaker 2: everyone casts this notion of a cozy community bank where

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Speaker 2: everyone kind of knows each other and so they put

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Speaker 2: some value on that. But that's not the only way

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Speaker 2: to have a banking system. You could have a Canada

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Speaker 2: style banking system, as you just pointed out. So all

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Speaker 2: these big existential questions at the moment.

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Speaker 1: And to me, a bank is just an app at

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Speaker 1: this point, no, for real, Like I have a bank

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Speaker 1: that does not have like physical branches that I go into.

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Speaker 3: They might have.

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Speaker 2: You don't have intense personal feelings for your bank?

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Speaker 1: No, No, I have like it's like the app works,

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Speaker 1: it doesn't crash. It's like, great, there's my bank. Anyway,

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Speaker 1: So what is the future of banks and what is

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Speaker 1: happening and will we have when they have a Canada

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Speaker 1: style banking system. I think even though things have quieted down,

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Speaker 1: it's sort of a good time. Actually, it's like take

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Speaker 1: stock of what's happening.

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Speaker 2: It is always a good time to talk about the

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Speaker 2: meaning of banks in America.

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Speaker 1: Well, I'm very excited today we have the perfect guests,

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Speaker 1: someone who works directly in this space and has for

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Speaker 1: a long time. We're going to be speaking with Scott Hildenbrand,

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Speaker 1: chief balance sheet strategist and head of financial Strategies at

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Speaker 1: Piper Sandler. Scott, thank you so much for coming in.

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Speaker 3: Hey, good morning, Joe and Tracy. Thanks for inviting me in.

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Speaker 3: I'm thrilled.

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Speaker 1: What do we actually just start with? Like, what is

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Speaker 1: a chief balance sheet strategist and head of financial strategies

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Speaker 1: at Piper Sandler Time.

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Speaker 3: I wish I had a nickel for every time I've

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Speaker 3: gotten that question. Joe, but no, so a chief balance

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Speaker 3: sheet strategist really is. I spend every day, all day,

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Speaker 3: predominantly on the road, working with the community banks all

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Speaker 3: throughout the country. So if you think about it, there's

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Speaker 3: about a thousand community banks that come through our group.

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Speaker 3: I have a team of thirty five of us, and

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Speaker 3: we spend every day all day looking at bank balance

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Speaker 3: sheets from an interest rate, risk perspective, a liquidity perspective,

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Speaker 3: a capital perspective, an investor perspective, regulatory perspective. So think

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Speaker 3: of sort of the top fifty banks and then everybody else.

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Speaker 3: I sort of work with everyone else and think through

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Speaker 3: on all of those issues that are certainly front and center.

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Speaker 3: As you to just chat a little bit about perfect guest.

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Speaker 2: So next question, how busy have you been over the

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Speaker 2: past three months?

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Speaker 3: You know, Tracy, it's interesting. It's the first time I

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Speaker 3: think my family and friends know what I do for

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Speaker 3: a liv. It has been incredibly busy, to the point

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Speaker 3: where I can't even go play golf with friends without

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Speaker 3: the word Silicon Valley, hedging, uninsured, all those types of

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Speaker 3: terms popping up. And I do a fair amount of

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Speaker 3: public speaking and a lot of people want to hear

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Speaker 3: about what's going on, what are others doing and thinking

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Speaker 3: about post the drama? And I love the way you

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Speaker 3: all described it, the drama around the Silicon Valley, etc.

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Speaker 4: Would you say, do agree was not a crisis?

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Speaker 3: I do, but I think it was also. What's a

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Speaker 3: lot easier for me to say that now versus when

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Speaker 3: Tracy was on vacation and when it was happening that

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Speaker 3: Sunday in March, when it felt pretty quickly like it

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Speaker 3: was getting out of control. But I think, as you said, Joe,

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Speaker 3: I think over the last three months we have seen

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Speaker 3: some stabilization. I think everybody's calmed down a little bit,

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Speaker 3: but there's still a lot to unpack and a lot

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Speaker 3: of challenges coming.

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Speaker 2: So why don't we do a little bit of looking

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Speaker 2: in the rear view mirror first and then we can

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Speaker 2: move on to what we've been seeing currently. But what

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Speaker 2: happened in March, how would you characterize the drama that

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Speaker 2: we saw or.

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Speaker 3: I think what ultimately happened. And again, being an asset

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Speaker 3: liability NERD that I am. All I have done for

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Speaker 3: twenty three years is modeled balance sheets. So I take assets,

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Speaker 3: I take the liabilities, I take changes in rates, and

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Speaker 3: we try to determine the impact what happens to those

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Speaker 3: balance sheets. One of the things that we were taught

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Speaker 3: very early on, and almost everyone who's listening, who's ever

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Speaker 3: modeled an interest rate risk for a bank, will tell

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Speaker 3: you that the deposit side of the world is the

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Speaker 3: ultimate hedge against higher rates. Right. And so if you

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Speaker 3: had told me, Joe or Tracy five years ago you

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Speaker 3: had me on here and you said, you know what,

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Speaker 3: there's a bank that's all they're going to do is

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Speaker 3: buy treasuries and all of their deposits are in checking accounts,

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Speaker 3: and by the way, they're going to fail. I would

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Speaker 3: have laughed at I would have laughed at both of you.

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Speaker 3: I wouldn't have come back. I don't know, you all

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Speaker 3: are crazy. So literally in March, Tracy'd answer your question,

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Speaker 3: I think everything was flipped upside down. What we had

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Speaker 3: all learned was the fact that operating accounts and checking

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Speaker 3: accounts are great until they're not. And what we've learned

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Speaker 3: also is that while it's been a slow bleed Joe

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Speaker 3: and you were sort of talking about this, we finally

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Speaker 3: all now really that there's really no contractual liabilities or

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Speaker 3: deposits on a bank balance sheet anymore. People can move

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Speaker 3: money a lot faster. Bank balance sheets are more athletic

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Speaker 3: and nimble. You couple that with really what happened if

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Speaker 3: you think about it too, is you think about from

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Speaker 3: an M and A perspective. There was no M and

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Speaker 3: A during twenty twenty and COVID for those couple of months.

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Speaker 3: Yet every single bank in the country did one. They

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Speaker 3: didn't realize it. They got no assets. An enormous amount

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Speaker 3: of deposits were dumped into the industry. They didn't ask

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Speaker 3: for it, major growth on a deposit front, interest rates

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Speaker 3: at zero, and no lending anywhere. So you think about

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Speaker 3: how balloons those balance sheets got. It's not like banks

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Speaker 3: woke up overnight and all of a sudden became fantastically

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Speaker 3: better at gathering deposits. So those balance sheets looked a

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Speaker 3: lot different. And then fast forward, we were a little

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Speaker 3: late to the inflation game. You go up five hundred

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Speaker 3: basis points in a very short period of time. You

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Speaker 3: have Twitter and the social media role here, and all

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Speaker 3: of a sudden, everybody got spooked and dollars started running out,

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Speaker 3: not like the WAMU days or not once what's a

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Speaker 3: wonderful life it was three hours and forty two billion dollars.

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Speaker 4: That's what happened.

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Speaker 2: Yeah, this is kind of the dark side of the app. Yeah, yeah,

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Speaker 2: it's just the flightiness of deposits. You can pull everything

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Speaker 2: out with the click of a button.

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Speaker 1: Now, I know, like for our listeners, and I've had

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Speaker 1: to explain what is it about just for sort of

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Speaker 1: like banking asset liability in the industry like one on one,

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Speaker 1: probably even pre one on one. Why is it the

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Speaker 1: deposits are interest rate hedge?

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Speaker 3: Sure so in theory over the years, historically most of

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Speaker 3: us all have checking accounts, We've got savings accounts, and predominantly,

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Speaker 3: if you think about it, banks make money not because

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Speaker 3: of the asset side the lending, it's because they don't

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Speaker 3: pay at market rates on the deposit side. Right, checking accounts,

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Speaker 3: nobody really cares what you're making on your checking account.

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Speaker 3: As long as the app works, you move your money around,

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Speaker 3: you're good. I think what what ultimately happened is for

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Speaker 3: years and years you'll hear the term beta and it's

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Speaker 3: not from an investor perspective. It's in the bank world.

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Speaker 3: Everybody likes to try to project every time the FED

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Speaker 3: moves how much a bank have to move their deposit

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Speaker 3: rates to keep money in and forever it's kind of

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Speaker 3: been this thirty to fifty percent, and I've never really

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Speaker 3: subscribed to it. And that's a separate topic, but typically

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Speaker 3: that's what we've seen historically. But unfortunately, what it doesn't

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Speaker 3: measure is the fact that not only is it a

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Speaker 3: rate that we have to pay, but dollars can move

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Speaker 3: so much faster based on the technology. And I'd argue

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Speaker 3: the demographics here's the bigger issue. If you think about

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Speaker 3: it from an asset liability perspective, I can't model the

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Speaker 3: demographic breakdown well enough. Yet you think about my father's

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Speaker 3: generation versus you know, my future grandchildren's generations, and you

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Speaker 3: think about how they view a bank sort of the

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Speaker 3: way you all were describing it today. There's a loyalty

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Speaker 3: trust matrix, and you think about the loyalty. A lot

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Speaker 3: of loyalty in my father's generation and very little trust.

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Speaker 3: He gets a two thousand dollars check, he is going

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Speaker 3: to a branch, he is going to make sure that

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Speaker 3: money is in. He gets his lollipop, he says hi,

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Speaker 3: and he leaves. Then you think about the generations beneath below.

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Speaker 3: There's a ton of trust. They'll move money around on

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Speaker 3: they don't even know the name of the bank they're

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Speaker 3: banking app. They'll move it so quickly, but there's very

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Speaker 3: little loyalty. And there in lies the difference and why

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Speaker 3: we're struggling with how to determine how to manage and

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Speaker 3: hedge a balance sheet from a deposit perspective.

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Speaker 2: Maybe the banking app should figure out a way to

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Speaker 2: deliver lollipops.

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Speaker 3: That's right.

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Speaker 2: Can I ask another step back question, which is you

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Speaker 2: know I was a banking correspondent soon after the two

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Speaker 2: thousand and eight financial crisis, and I remember the big

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Speaker 2: hope of banks back then was interest rates are going

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Speaker 2: to rise and will finally be able to make money

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Speaker 2: off of lending. What happened to that portion of it?

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Speaker 3: That's the best question I've gotten around this topic over

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Speaker 3: the last ninety or one hundred days, Tracy, And I'll

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Speaker 3: tell you why. For if I had a nickel for

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Speaker 3: every bank that told me in January of twenty twenty two,

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Speaker 3: so not too long ago, that they couldn't wait for

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Speaker 3: rates to rise. We were prepared for rates to rise, Scott.

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Speaker 3: We're going to look so good it's coming finally. I

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Speaker 3: mean I for honestly, I've been doing this twenty three years.

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Speaker 3: I could have taken the first twenty years off. Everybody

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Speaker 3: told me rates were going higher, they never moved right.

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Speaker 3: It was very low interest rate environment for twenty years.

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Speaker 3: Finally we see interest rates hied tracy and it took about,

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Speaker 3: I don't know, nine months until everybody called me and

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Speaker 3: said we need help pedging against higher rates. And I'm like, well,

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Speaker 3: wait a minute. But ultimately, what we didn't realize, right,

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Speaker 3: what we didn't facet in is the fact that, yes,

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Speaker 3: when the FED hikes interest rates, and it's why you

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Speaker 3: saw twenty twenty two. In the first six months, we

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Speaker 3: saw great margin expansion for banks, which was phenomenal. The

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Speaker 3: asset side was resetting higher, and nobody was paying up

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Speaker 3: for deposits because it wasn't based on the FED. It's

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Speaker 3: based on supply and demand. And we had so much

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Speaker 3: supply of deposits after COVID that it took a while

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Speaker 3: for anyone had to have to pay. Then all of

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Speaker 3: a sudden, we had to pay. As things started to

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Speaker 3: catch up, Treasury rates got a lot higher. But here's

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Speaker 3: the bigger problem. Everybody was looking at their balance sheet

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Speaker 3: as if it would stay the same in terms of

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Speaker 3: product mix, in terms of size, and ultimately what happened

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Speaker 3: is everybody said, well, wait a minute, I can move

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Speaker 3: money all over the place. Not only two different banks,

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Speaker 3: but banks were competing against treasury rates, right, So all

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Speaker 3: of a sudden, people moved their money around a lot faster.

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Speaker 3: So we always say it's not changes in rates that

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Speaker 3: caused it, It was the way and how athletic bank

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Speaker 3: balance youse are today versus where they used to be,

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Speaker 3: and it moves a lot faster, tracy, and that's where

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Speaker 3: people got caught.

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Speaker 2: Just a follow up based on that, But how much

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Speaker 2: of the concerns that banks tend to have are shaped

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Speaker 2: by things in a stress test? So I'm thinking back,

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Speaker 2: worst case scenario of the banking stress test for a

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Speaker 2: long time was a recession and rates going very very low.

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Speaker 2: It didn't really have much as far as I can remember, Like,

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Speaker 2: there wasn't that much modeling based on rates going really

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Speaker 2: really high. So does that tend to shape bank behavior? Like?

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Speaker 2: Is that the scenario that they end up worrying about?

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Speaker 3: This was the double whammy? You're right if you think

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Speaker 3: about you know, if you pulled one hundred CEOs throughout

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Speaker 3: the country and it was two years ago, even four

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Speaker 3: years ago, ten years ago, and you say, what's the

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Speaker 3: worst scenario, they tell you, well, rates down to zero

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Speaker 3: probably means recession. We've got credit price problems, etc. That's

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Speaker 3: going to be a really tough environment for us. Where

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Speaker 3: I think we didn't focus enough on is really understanding

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Speaker 3: the impact that both technologies social media and the demographic

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Speaker 3: changes around the deposit front from a liquidity perspective in

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Speaker 3: a higher rate environment. This wasn't a we got to

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Speaker 3: slow the economy down from because it's booming organically. This was, Hey,

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Speaker 3: we're gonna throw way more money into your industry than

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Speaker 3: you asked for, and then we're gonna suck it out

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Speaker 3: in record pace. And by the way, we're gonna do

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Speaker 3: it over a nine month period, and hopefully you're prepared

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Speaker 3: to handle that.

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Speaker 1: I want to talk more about the demographics and really

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Speaker 1: get these sort of like long term structural changes. But

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Speaker 1: before we do, I just want to sort of like

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Speaker 1: ask one more question about this sort of like post

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Speaker 1: SVB environment. Like KRI the Regional bank ETF is actually

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Speaker 1: still lower than it was on March thirteenth, like they've

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Speaker 1: stopped spiraling. But the valuations you mentioned, I guess like

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Speaker 1: deposits have been stable. But can you talk about like

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Speaker 1: there has clearly been this huge repricing of the sector

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Speaker 1: that has not bounced back since then. I mean it's flat,

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Speaker 1: like there's not everything else is really what about this moment,

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Speaker 1: either sort of perceptually or business wise, like, really has

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Speaker 1: changed how people view the viability the business prospects of

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Speaker 1: these banks.

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Speaker 3: Right, there's well, as you know, and both M and

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Speaker 3: A and invaluation unknown as a problem. Right, And so

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Speaker 3: you've got a few unknowns, Joe, You've got you've got

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Speaker 3: regulatory issues coming further stress more capital what is it

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Speaker 3: going to be? That's obviously whatever it is, we all

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Speaker 3: know it's gonna hurt earnings, right, So you've had it correct. Yes,

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Speaker 3: it'll trickle down, there'll be some impacts. And then you

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Speaker 3: know you also have and I talked to a lot

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Speaker 3: of investors to your point, Joe, you know, almost half

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Speaker 3: the banks in the country trading below their tangible book value.

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Speaker 3: It's almost weird for me to say that. And we

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Speaker 3: really haven't seen any credit losses yet. The problem is

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Speaker 3: almost every investor I talk to, whether it's unknown around

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Speaker 3: what we just talked about, the regulatory environment, or quite

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Speaker 3: frankly unknown around interest rates, or the final one, you know,

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Speaker 3: is unknown around credit. And I haven't met an investor

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Speaker 3: that's excited about the incredit environment which we're headed into.

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Speaker 3: And I think the real problem is we're sort of

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Speaker 3: stuck in this nobody knows mode. I'd rather us, you know,

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Speaker 3: let's take some hits here, Let's have some credit concerns

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Speaker 3: and start to deal with them. We're kind of waiting

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Speaker 3: and waiting for the hurricane, but it hasn't come, and

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Speaker 3: it might not be a major hurricane, it might be small.

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Speaker 3: We just don't know, and so from evaluation perspective, it's

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Speaker 3: tough for anyone to invest in anything from that perspective.

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Speaker 1: And just real quickly the deposits have settled down.

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Speaker 3: Correct.

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Speaker 2: Okay, So Joe mentioned that KBW Regional Bank Index. Can

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Speaker 2: you talk a little bit more about the differentiation that

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Speaker 2: we've seen between the big banks, so the JP Morgan's

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Speaker 2: of the world, which seem to have been massive beneficiaries

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Speaker 2: of these liquidity issues, the regionals and then the really

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Speaker 2: small community banks, Because I think a lot of the

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Speaker 2: community banks ended up getting lumped up in the regional category.

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Speaker 2: But actually they seem to do okay.

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Speaker 3: Right, And I think the biggest challenge right now is

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Speaker 3: exactly the way you lay it out. If you think

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Speaker 3: about it, the largest banks in the country rely a

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Speaker 3: lot less on deposit in loan out right. They make

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Speaker 3: a spread, but they don't live and die by their

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Speaker 3: spread business. The smaller tracy the bank you get to,

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Speaker 3: the more they rely on spread business, and that's a

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Speaker 3: problem when you've got an inverted yield curve. You've got

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Speaker 3: deposit costs continue to elevate. They've stabilized, Joe A to

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Speaker 3: your earlier point, They've stabilized from a balance perspective, but

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Speaker 3: I don't believe we stabilized yet on how much it

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Speaker 3: costs me to keep people here, or the concern around

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Speaker 3: how much I'm going to cost to keep people here.

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Speaker 3: So you've got margin compression for the smaller institutions who

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Speaker 3: have very little fee income. You think of out JP Morgan,

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Speaker 3: They've got revenues all over the place in all different

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Speaker 3: business lines. You go down to the smallest community banks

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Speaker 3: in the country, and they live and die by depositing

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Speaker 3: loan out, make the spread, manage that spread, and pay

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Speaker 3: for everything they need to pay for. So that's the

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Speaker 3: simplistic view, Tracy of the differences as you go down,

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Speaker 3: there's obviously some others as well. Scale here is unfortunately

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Speaker 3: playing a game, going to play a large role in

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Speaker 3: the game. Excuse me as we think about it. I

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Speaker 3: sound like an investment banker in that that leads to

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Speaker 3: M and A. But it's really true if you think

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Speaker 3: about scale in a world that I think across the board,

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Speaker 3: bank margins will continue to be lower apples to apples

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Speaker 3: in any rate environment because we're probably going to have

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Speaker 3: to hold a little more aquidity, probably got to hold

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Speaker 3: a little bit more capital, and certainly having the rear

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Speaker 3: view mirror of what happened at Silicon Valley. Yet Tracy,

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Speaker 3: to your point, there's maybe five banks that look like

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Speaker 3: Silicon Valley out of four thousand. Yet the others are

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Speaker 3: going to pay for some of that as well, and

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Speaker 3: that's hard.

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Speaker 4: You know.

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Speaker 1: Right around the time of Silicon I think like I

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Speaker 1: did a little bit of traveling. Tracy and I were

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Speaker 1: in Chicago, for example. Not long after that, I went

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Speaker 1: to like a wedding in Boston, and the only reason

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Speaker 1: I bring that up is like when you're in a

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Speaker 1: new area, I find you just see all these banks

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Speaker 1: you've never heard of, these like tiny local banks. Like

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Speaker 1: you know, I'm probably making it up, but it's like

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Speaker 1: the like you know, the Medford Community Savings Bank outside

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Speaker 1: of Boston, and the sort of you know, Third Bank

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Speaker 1: of Illinois, and just all these like branches talk to

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Speaker 1: us about like essentially sitting aside rate compression.

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Speaker 4: And rates go up and down.

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Speaker 1: We don't really know what the future like this sort

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Speaker 1: of like operating business these days that they're in and

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Speaker 1: the sort of challenge they have of like bringing in

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Speaker 1: new depositors for a local bank. Again, when I could

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Speaker 1: just like go on you know, job dot com.

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Speaker 3: You're right, Joe, And and it's one of the things

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Speaker 3: I do too. It's just I happen to know all

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Speaker 3: those banks as I travel around, but it's the same

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Speaker 3: and I'm like, oh, that's what that's located. But as

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Speaker 3: you think about their their business, right, yeah, all of

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Speaker 3: those smaller banks, most of those smaller banks was started

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Speaker 3: in the commun unity folks at the schools, at the churches,

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Speaker 3: at the country club started this bank in town, and

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Speaker 3: everybody kind of banked in that town, and you think

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Speaker 3: about that worked for a long period of time. Back

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Speaker 3: to that loyalty trust component, there was a lot of

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Speaker 3: loyalty to who you banked with. You fast forward to

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Speaker 3: sort of where we are today, and you think about

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Speaker 3: the demographic changes. You think about ten, fifteen, twenty years ago,

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Speaker 3: Joe a bank balance sheet, the community bank world had

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Speaker 3: almost half of its deposits were in CDs. I bring

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Speaker 3: that up because if you think about it, that gave

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Speaker 3: banks time. You have a one year CD on your

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Speaker 3: balance sheet. Rates don't move on those deposits for a year,

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Speaker 3: no matter what rates are doing. You fast forward to

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Speaker 3: where we are today and you think about two things.

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Speaker 3: The average age of a CD holder is a lot

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Speaker 3: higher than you would guess at almost any institution in

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Speaker 3: the country.

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Speaker 1: Clus the youngest person who even owns the CD of

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Speaker 1: the United States.

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Speaker 3: I'm looking for that individuals. I want to know who

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Speaker 3: it is. But you're right, it is really that demographic

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Speaker 3: has changed. But that's a really important point because as

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Speaker 3: banks are trying to grow deposits, they're out there trying

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Speaker 3: to reach in CD world. Yet I do a fair

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Speaker 3: amount of interviewing for folks that originally Sandor orneil Nolt,

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Speaker 3: Piper Sandler want to come to New York learn about

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Speaker 3: community banking and way smarter than I am. And they

437
00:20:11,440 --> 00:20:13,320
Speaker 3: ask me questions I can answer, but I always have

438
00:20:13,359 --> 00:20:15,000
Speaker 3: a question they can't answer. Do you know what a

439
00:20:15,040 --> 00:20:17,240
Speaker 3: CD is? And they've never heard of it, whether it

440
00:20:17,320 --> 00:20:19,679
Speaker 3: was banking or music. And yet then I'll go to

441
00:20:19,680 --> 00:20:21,480
Speaker 3: the next boardroom. I'm in the next bank of the Sey.

442
00:20:21,520 --> 00:20:23,000
Speaker 3: Now we're gonna fill the liquidity hole. We're going to

443
00:20:23,000 --> 00:20:25,439
Speaker 3: go out and run a fifteen month CD special. The

444
00:20:25,520 --> 00:20:28,720
Speaker 3: game has changed, the demographics have changed. People want CD

445
00:20:28,840 --> 00:20:33,560
Speaker 3: rates with money market flexibility and operational flexibility. And that

446
00:20:33,680 --> 00:20:37,440
Speaker 3: is the biggest dynamic we're seeing for the smaller community banks.

447
00:20:37,440 --> 00:20:40,240
Speaker 3: And that's what happened. Back to Tracy's earlier question, the

448
00:20:40,320 --> 00:20:43,280
Speaker 3: deposit world and how much we can hedge with the

449
00:20:43,320 --> 00:20:46,439
Speaker 3: deposits is going away quickly. Without those CDs, we have

450
00:20:46,440 --> 00:20:49,680
Speaker 3: no contractual liabilities on most bank balance sheets anymore.

451
00:20:50,200 --> 00:20:52,639
Speaker 2: On the deposit beta point. I mean, there are some

452
00:20:52,880 --> 00:20:57,119
Speaker 2: banks out there that are offering very competitive rates, at

453
00:20:57,160 --> 00:21:00,679
Speaker 2: least compared to others, and you are the perfect person

454
00:21:00,880 --> 00:21:04,280
Speaker 2: to answer this question, But what are they doing that

455
00:21:04,440 --> 00:21:08,200
Speaker 2: others are not. And you know, I get that scale

456
00:21:08,359 --> 00:21:10,440
Speaker 2: is a factor here. So if you if you're big,

457
00:21:10,560 --> 00:21:13,800
Speaker 2: you can maybe afford to return a little bit more

458
00:21:13,840 --> 00:21:17,560
Speaker 2: to depositors. But maybe for some of the non megabanks,

459
00:21:17,760 --> 00:21:20,520
Speaker 2: is it risk your lending? Right?

460
00:21:20,560 --> 00:21:23,840
Speaker 3: Great question, And most of it comes honestly tracy from

461
00:21:23,920 --> 00:21:27,040
Speaker 3: supply demand. And what I mean by that is if

462
00:21:27,080 --> 00:21:29,280
Speaker 3: you go and did a scan of one of them,

463
00:21:29,400 --> 00:21:31,280
Speaker 3: and it's a very high level metric, but one of

464
00:21:31,320 --> 00:21:33,000
Speaker 3: the metrics I love to look at for banks in

465
00:21:33,040 --> 00:21:36,080
Speaker 3: the countries loan to deposit ratio. And when you start

466
00:21:36,119 --> 00:21:39,040
Speaker 3: seeing that number get closer and closer than ninety percent,

467
00:21:39,080 --> 00:21:41,919
Speaker 3: then up to one hundred percent, you better bet that

468
00:21:42,000 --> 00:21:44,280
Speaker 3: those institutions that's where you want to keep your money,

469
00:21:44,280 --> 00:21:46,480
Speaker 3: because they're going to pay. They're going to pay whatever

470
00:21:46,560 --> 00:21:49,240
Speaker 3: they have to pay to keep money in there, both

471
00:21:49,240 --> 00:21:52,199
Speaker 3: from a liquidity metric a regulatory metric to keep that

472
00:21:52,280 --> 00:21:55,320
Speaker 3: loan to deposit ratio within reason so that they're not

473
00:21:55,359 --> 00:21:57,919
Speaker 3: an outlier, right. And so you're seeing a little bit

474
00:21:58,000 --> 00:22:00,520
Speaker 3: of that, you're seeing a little bit of quite frankly,

475
00:22:01,000 --> 00:22:03,000
Speaker 3: most banks will tell me right now they're willing to

476
00:22:03,000 --> 00:22:05,840
Speaker 3: pay those you see those today, I was in Chicago.

477
00:22:05,880 --> 00:22:07,800
Speaker 3: I was at an airport head of the airport, and

478
00:22:07,840 --> 00:22:09,639
Speaker 3: on my car ride this morning, I saw a CD

479
00:22:09,720 --> 00:22:12,600
Speaker 3: for five thirty five. I thought to myself, the same thing.

480
00:22:12,640 --> 00:22:14,920
Speaker 3: Does that mean a typical bank margins three and a

481
00:22:14,960 --> 00:22:17,920
Speaker 3: half percent? Are they putting on loans at nine percent?

482
00:22:18,359 --> 00:22:21,959
Speaker 3: Most banks aren't or they're you know, so it begs

483
00:22:22,000 --> 00:22:24,719
Speaker 3: the question of you're going to see margin compression. I

484
00:22:24,760 --> 00:22:26,720
Speaker 3: think I've never met a bank that told me they're

485
00:22:26,720 --> 00:22:28,560
Speaker 3: going to be less than assets next year than they

486
00:22:28,600 --> 00:22:30,240
Speaker 3: are this year. I think you're going to meet a

487
00:22:30,280 --> 00:22:31,399
Speaker 3: lot of new banks that are going to be a

488
00:22:31,400 --> 00:22:34,320
Speaker 3: lot smaller than they were a year ago, because all

489
00:22:34,359 --> 00:22:37,119
Speaker 3: of a sudden doesn't make a ton of sense financially.

490
00:22:37,400 --> 00:22:39,880
Speaker 3: But right now we're still stabilizing and willing to pay

491
00:22:39,960 --> 00:22:41,879
Speaker 3: up a little bit. But over time, Tracy, as that

492
00:22:41,920 --> 00:22:44,480
Speaker 3: stabilizes those rates, I expect them to start to come

493
00:22:44,520 --> 00:22:47,679
Speaker 3: down a little bit because I don't see loans catching

494
00:22:47,800 --> 00:22:50,320
Speaker 3: up and making the equivalent yields that you need to.

495
00:22:51,119 --> 00:22:54,040
Speaker 1: Can we talk about sort of non interest costs for

496
00:22:54,119 --> 00:22:56,399
Speaker 1: the bank, and I'm thinking, you know, there's a million

497
00:22:56,520 --> 00:23:00,360
Speaker 1: stories that we've probably run about JP Moore and going

498
00:23:00,359 --> 00:23:03,359
Speaker 1: out and hiring a thousand people who understand artificial intelligence

499
00:23:03,480 --> 00:23:06,120
Speaker 1: right now, you know, it's like and like, I again,

500
00:23:06,160 --> 00:23:10,280
Speaker 1: I imagine that like Cambridge Community Bankcorp. Is not an attractive

501
00:23:10,320 --> 00:23:15,159
Speaker 1: place for an AI expert or with But like you know, like,

502
00:23:15,200 --> 00:23:16,760
Speaker 1: what is that going to mean about the sort of

503
00:23:16,800 --> 00:23:20,639
Speaker 1: like product gap that exists between these megabanks that have

504
00:23:20,760 --> 00:23:23,120
Speaker 1: like huge tech teams and the local.

505
00:23:23,320 --> 00:23:26,040
Speaker 3: Yeah, that that by far keeps I think a lot

506
00:23:26,040 --> 00:23:28,600
Speaker 3: of bank CEOs that we're talking about today he or

507
00:23:28,600 --> 00:23:31,720
Speaker 3: she up at night because the gap is widening. Right,

508
00:23:31,800 --> 00:23:35,680
Speaker 3: The gap continues to widen. And it's not even the technology,

509
00:23:36,080 --> 00:23:39,359
Speaker 3: it's the combination of the technology and your users. Right.

510
00:23:39,400 --> 00:23:42,960
Speaker 3: You think about the average demographic again going back to

511
00:23:43,200 --> 00:23:46,600
Speaker 3: how much more in demand those technology skills and tools

512
00:23:46,640 --> 00:23:49,959
Speaker 3: are for a bank to offer, both for hiring and

513
00:23:50,119 --> 00:23:54,040
Speaker 3: also to gather deposits, gather customers, and so that is

514
00:23:54,080 --> 00:23:57,479
Speaker 3: an enormous cost. That and fraud are two of the

515
00:23:57,520 --> 00:23:59,240
Speaker 3: biggest costs for banks today.

516
00:23:59,240 --> 00:24:02,639
Speaker 1: It's talk about fraud and how that manifest is a

517
00:24:02,680 --> 00:24:03,080
Speaker 1: cost for.

518
00:24:03,000 --> 00:24:05,680
Speaker 3: Those Sure, I mean you think about it, and you know,

519
00:24:05,880 --> 00:24:08,400
Speaker 3: if you've ever gotten a text from your bank saying, hey,

520
00:24:08,480 --> 00:24:11,520
Speaker 3: we just noticed you paid you know somewhere and you're

521
00:24:11,560 --> 00:24:13,480
Speaker 3: not even in that state. We took care of it

522
00:24:13,520 --> 00:24:14,800
Speaker 3: for you, and then they have to go work it

523
00:24:14,800 --> 00:24:16,520
Speaker 3: out and try to go get it back. They're not

524
00:24:16,520 --> 00:24:19,080
Speaker 3: getting every dollar back. That's just a cost of doing

525
00:24:19,119 --> 00:24:21,879
Speaker 3: business in the bank world. You combine that with margin

526
00:24:21,880 --> 00:24:24,240
Speaker 3: compression on your real business, how much you got to

527
00:24:24,280 --> 00:24:27,159
Speaker 3: pay for technology to get talent and the technology in there,

528
00:24:27,160 --> 00:24:31,200
Speaker 3: and it's another big drag on earnings overall at the institution.

529
00:24:31,960 --> 00:24:34,760
Speaker 2: So I remember a lot of these themes from the

530
00:24:34,800 --> 00:24:37,439
Speaker 2: post two thousand and eight banking environment, and there was

531
00:24:37,480 --> 00:24:41,080
Speaker 2: this big question of, well, why would anyone start a bank?

532
00:24:41,760 --> 00:24:46,480
Speaker 2: Because we have higher regulation, we had sluggish economic growth

533
00:24:46,560 --> 00:24:49,879
Speaker 2: at that time. The tech spend was already an issue,

534
00:24:49,960 --> 00:24:53,119
Speaker 2: the idea that while opening up brick and mortar bank

535
00:24:53,200 --> 00:24:57,520
Speaker 2: branches is very expensive, we can't do that anymore. Is

536
00:24:57,560 --> 00:25:02,000
Speaker 2: there a bowl case for starting a bank nowadays? And

537
00:25:02,359 --> 00:25:04,399
Speaker 2: I remember again post two thousand and eight. I think

538
00:25:04,440 --> 00:25:06,480
Speaker 2: there was one bank that opened in like twenty ten,

539
00:25:06,640 --> 00:25:10,400
Speaker 2: and then one new bank, Denovo Bank in twenty thirteen,

540
00:25:10,600 --> 00:25:13,000
Speaker 2: and I went to see it. It was this little

541
00:25:13,119 --> 00:25:17,320
Speaker 2: Amish bank in Lancaster County in Pennsylvania called Bank of Birdenhad,

542
00:25:17,400 --> 00:25:20,800
Speaker 2: and it was honestly the most adorable bank that I've

543
00:25:20,800 --> 00:25:22,200
Speaker 2: ever seen anyway.

544
00:25:22,560 --> 00:25:25,080
Speaker 3: Side note, well, that's one of the big things that

545
00:25:25,640 --> 00:25:28,000
Speaker 3: I like. Just using the word, the word Denovo. We

546
00:25:28,000 --> 00:25:30,440
Speaker 3: don't say it anymore. Right, It's tough tracy from an

547
00:25:30,440 --> 00:25:33,480
Speaker 3: investor perspective to say I'm going to I'm going to

548
00:25:33,560 --> 00:25:35,680
Speaker 3: start a bank, when on earth am I going to

549
00:25:35,720 --> 00:25:36,480
Speaker 3: get my money back?

550
00:25:36,800 --> 00:25:36,960
Speaker 4: Right?

551
00:25:37,000 --> 00:25:40,080
Speaker 3: It's going to take a lot longer than it did ten, well, fifteen,

552
00:25:40,119 --> 00:25:42,480
Speaker 3: twenty years ago. Now I'm getting older. That's part of

553
00:25:42,480 --> 00:25:45,200
Speaker 3: the problem. You're not seeing a lot of the Denovo

554
00:25:45,320 --> 00:25:48,840
Speaker 3: world because, both from a regulatory perspective and just apples

555
00:25:48,880 --> 00:25:52,520
Speaker 3: to apples, earnings for banks on average are going to

556
00:25:52,560 --> 00:25:55,080
Speaker 3: be harder and harder to come by, which again just

557
00:25:55,119 --> 00:25:57,320
Speaker 3: makes the return longer and longer. And folks say, I

558
00:25:57,359 --> 00:25:59,720
Speaker 3: could go invest in something else and probably get my

559
00:25:59,720 --> 00:26:02,239
Speaker 3: money back a lot faster. Because we used to look

560
00:26:02,280 --> 00:26:05,520
Speaker 3: at the stats M and A, this is an interesting component.

561
00:26:05,720 --> 00:26:08,080
Speaker 3: M and A really never changes in terms of how

562
00:26:08,080 --> 00:26:10,199
Speaker 3: many banks sell a year over a twenty twenty five

563
00:26:10,280 --> 00:26:13,120
Speaker 3: year period, but for half of that timeframe, we had

564
00:26:13,119 --> 00:26:16,199
Speaker 3: a lot of denovos. Now we don't, and that's why

565
00:26:16,280 --> 00:26:19,320
Speaker 3: you're seeing the shrinking of the size of the banks

566
00:26:19,359 --> 00:26:20,639
Speaker 3: a lot more. Even though M and A is in

567
00:26:20,680 --> 00:26:23,119
Speaker 3: a little bit of a rain delay right now. Denovos

568
00:26:23,119 --> 00:26:25,760
Speaker 3: are tough to come by, tough to get people excited about.

569
00:26:26,119 --> 00:26:28,239
Speaker 3: Once in a while, though, you'll see some pop up

570
00:26:28,280 --> 00:26:31,440
Speaker 3: and you hear some people talking today around you know, look,

571
00:26:31,480 --> 00:26:33,800
Speaker 3: now I'm not at Silicon Valley. I'm a JP Morgan,

572
00:26:34,119 --> 00:26:36,720
Speaker 3: and I'm just a number, and so there is still

573
00:26:36,760 --> 00:26:39,360
Speaker 3: the relationship side. Is there a way to marry the

574
00:26:39,400 --> 00:26:42,399
Speaker 3: technology and the and the relationship. Sorry interrupt you, Joe.

575
00:26:42,520 --> 00:26:43,600
Speaker 4: No that's great, But no you didn't.

576
00:26:43,840 --> 00:26:46,040
Speaker 1: I was interrupting you, but it's because you sort of

577
00:26:46,080 --> 00:26:49,560
Speaker 1: anticipated my next question. So, like, community banks strike me

578
00:26:49,600 --> 00:26:52,240
Speaker 1: as one of those things like mom and apple pie

579
00:26:52,240 --> 00:26:54,600
Speaker 1: in baseball, which is like everyone loves the idea of

580
00:26:54,640 --> 00:26:58,400
Speaker 1: the community bank, right, and politicians. You know, my understanding

581
00:26:58,480 --> 00:27:01,119
Speaker 1: is that actually in DC, the community banks are like

582
00:27:01,160 --> 00:27:04,280
Speaker 1: pretty well represented, and that politicians like to make sure

583
00:27:04,280 --> 00:27:07,520
Speaker 1: it's like, you know, well, my bank and my constituents banked,

584
00:27:07,520 --> 00:27:10,200
Speaker 1: and Tulsa get the same treatment as the fantasy in

585
00:27:10,200 --> 00:27:10,600
Speaker 1: New York.

586
00:27:10,520 --> 00:27:11,399
Speaker 4: Banks and all that stuff.

587
00:27:11,640 --> 00:27:14,040
Speaker 1: What would be lost in terms of like what is

588
00:27:14,080 --> 00:27:17,360
Speaker 1: different about community banks in terms of both the relationships

589
00:27:17,440 --> 00:27:19,600
Speaker 1: but also like their asset mix and the type of

590
00:27:19,640 --> 00:27:23,639
Speaker 1: business that they do that goes away if they have

591
00:27:23,720 --> 00:27:25,520
Speaker 1: trouble remaining robust business.

592
00:27:25,600 --> 00:27:27,479
Speaker 3: I think we've got a great example of it. And

593
00:27:27,520 --> 00:27:30,080
Speaker 3: it was so many other things going on, Joe, that

594
00:27:30,160 --> 00:27:32,560
Speaker 3: we didn't maybe notice it all the way. I give

595
00:27:32,640 --> 00:27:36,719
Speaker 3: such tremendous credit to the community bank space during COVID

596
00:27:37,480 --> 00:27:40,879
Speaker 3: because if you think about how quickly they they reacted

597
00:27:41,400 --> 00:27:43,440
Speaker 3: on the triple P and were able to get out

598
00:27:43,480 --> 00:27:47,440
Speaker 3: and meet their customers' needs at a very, very challenging time.

599
00:27:47,480 --> 00:27:49,119
Speaker 3: It was a short window of challenge, right, but it

600
00:27:49,160 --> 00:27:52,560
Speaker 3: was a very scary time in terms of the small

601
00:27:52,600 --> 00:27:56,040
Speaker 3: business side of the world be being helped out. And

602
00:27:56,080 --> 00:27:59,000
Speaker 3: the largest bank said, we understand what you want us

603
00:27:59,000 --> 00:28:01,680
Speaker 3: to do, but we remember and how much I got

604
00:28:01,680 --> 00:28:03,720
Speaker 3: in trouble for getting involved in this, so we're gonna

605
00:28:03,760 --> 00:28:06,840
Speaker 3: slow play it a little bit. Whereas the small community banks,

606
00:28:07,160 --> 00:28:08,960
Speaker 3: I'm telling you, I was really proud to know a

607
00:28:08,960 --> 00:28:10,800
Speaker 3: lot of them. I had a friend call me who

608
00:28:10,800 --> 00:28:13,800
Speaker 3: said his father ran a business, a small business. He said, Hey,

609
00:28:13,800 --> 00:28:16,200
Speaker 3: could you get my dad, he banks at XYZ bank?

610
00:28:16,240 --> 00:28:18,400
Speaker 3: Could you actually get him in touch with I called

611
00:28:18,400 --> 00:28:20,439
Speaker 3: the treasure. We made the connection, he got his money,

612
00:28:20,600 --> 00:28:23,280
Speaker 3: and it just felt really good that there was that dynamic.

613
00:28:23,359 --> 00:28:25,840
Speaker 3: So I think there's something there, Joe that I think

614
00:28:25,920 --> 00:28:29,640
Speaker 3: banks do a great job of executing their helping their clients.

615
00:28:29,800 --> 00:28:31,240
Speaker 3: They do a poor job marketing.

616
00:28:32,240 --> 00:28:35,040
Speaker 1: Is there something I mean, I think that's a great example.

617
00:28:35,160 --> 00:28:38,760
Speaker 1: Is there something in the asset side or the loan side,

618
00:28:38,760 --> 00:28:41,800
Speaker 1: whether there are's still like whether it's real estate, certain

619
00:28:41,880 --> 00:28:44,920
Speaker 1: types of real estate transactions, maybe like medium and small

620
00:28:44,960 --> 00:28:46,080
Speaker 1: business type loans.

621
00:28:46,120 --> 00:28:48,040
Speaker 4: Like that's like I want to know, build a little.

622
00:28:47,760 --> 00:28:51,200
Speaker 1: Factory and where actually there's like a clear advantage to

623
00:28:51,320 --> 00:28:53,960
Speaker 1: like the local bank that knows the space, because that's

624
00:28:54,000 --> 00:28:55,960
Speaker 1: like the theoretical idea, they know the community and they

625
00:28:55,960 --> 00:28:57,720
Speaker 1: can do this. But like talk to us about how

626
00:28:57,720 --> 00:28:59,560
Speaker 1: that actually how that plays out.

627
00:28:59,600 --> 00:29:02,080
Speaker 3: Sure it plays out a lot, and I'll tell you

628
00:29:02,160 --> 00:29:05,200
Speaker 3: the asset side is really becoming where banks can try

629
00:29:05,200 --> 00:29:08,720
Speaker 3: to differentiate themselves on service and relationship and knowing the community.

630
00:29:09,440 --> 00:29:11,440
Speaker 3: I know my dad's on a board of a country

631
00:29:11,440 --> 00:29:13,640
Speaker 3: club and he's probably embarrassed I'm even talking about it,

632
00:29:13,640 --> 00:29:15,960
Speaker 3: But he was telling me how the bank that was

633
00:29:16,000 --> 00:29:17,720
Speaker 3: serving the country code I want to do some work

634
00:29:17,760 --> 00:29:19,160
Speaker 3: and wanted to get a loan, but the loan was

635
00:29:19,200 --> 00:29:21,200
Speaker 3: like two or three million dollars, and they think that's

636
00:29:21,240 --> 00:29:23,800
Speaker 3: a lot of money to a large bank. That's almost

637
00:29:23,880 --> 00:29:26,480
Speaker 3: not worth the time, the risk, the headline risk. He said,

638
00:29:26,520 --> 00:29:30,040
Speaker 3: there was two or three small community banks willing, hustling,

639
00:29:30,200 --> 00:29:32,520
Speaker 3: wanting to be helpful, know the market really well. And

640
00:29:32,560 --> 00:29:35,000
Speaker 3: so that's a great example. Again, I just think the

641
00:29:35,120 --> 00:29:38,800
Speaker 3: nimble and athleticness of a community bank versus the largest

642
00:29:38,880 --> 00:29:41,239
Speaker 3: is really one of the advantages that are there that

643
00:29:41,240 --> 00:29:43,240
Speaker 3: they need to play up more. They do a better

644
00:29:43,320 --> 00:29:50,440
Speaker 3: job at that. I think.

645
00:30:00,920 --> 00:30:05,880
Speaker 2: Okay, so smaller banks might have better relationships, might do

646
00:30:05,960 --> 00:30:08,600
Speaker 2: a better job of small business lending or supporting the

647
00:30:08,600 --> 00:30:12,320
Speaker 2: individual community. The big banks have economies of scale that

648
00:30:12,440 --> 00:30:16,600
Speaker 2: make it possible to earn a relatively decent return at

649
00:30:16,640 --> 00:30:20,640
Speaker 2: various times. I'm going to ask the big question, but

650
00:30:20,800 --> 00:30:24,640
Speaker 2: putting it all together, what does the ideal banking system

651
00:30:24,840 --> 00:30:28,120
Speaker 2: in the US actually look like? How should we balance

652
00:30:28,200 --> 00:30:30,040
Speaker 2: the small banks with the bank? Yeah?

653
00:30:30,120 --> 00:30:33,880
Speaker 3: Great, great question, and again, it's a very difficult one

654
00:30:33,920 --> 00:30:36,880
Speaker 3: to answer, you know, spot on, Tracy, But my own gut,

655
00:30:36,960 --> 00:30:39,640
Speaker 3: my own kind of experience. If we're at four thousand

656
00:30:39,640 --> 00:30:43,240
Speaker 3: banks right now, we're probably heading somewhere towards. I was

657
00:30:43,240 --> 00:30:44,920
Speaker 3: talking about some of the last night, maybe a couple

658
00:30:44,960 --> 00:30:48,200
Speaker 3: of hundred banks over the next ten to fifteen years.

659
00:30:48,360 --> 00:30:51,160
Speaker 3: And I think there's room for the largest, and I

660
00:30:51,200 --> 00:30:53,880
Speaker 3: think there's room for the community bank world. And maybe

661
00:30:53,920 --> 00:30:55,560
Speaker 3: I'm being a little light, Yeah.

662
00:30:55,400 --> 00:30:57,240
Speaker 4: We might only have a couple of hundred banks.

663
00:30:57,400 --> 00:31:00,160
Speaker 3: I'm thinking over the next fifteen to twenty years, and

664
00:31:00,480 --> 00:31:02,160
Speaker 3: I think what you're going to see or you're going

665
00:31:02,200 --> 00:31:05,960
Speaker 3: to see great bankers merging together to really start creating

666
00:31:06,080 --> 00:31:10,280
Speaker 3: more of the mid size, smaller regionals that can deliver

667
00:31:10,440 --> 00:31:14,320
Speaker 3: better service and have more economies of scale. I really

668
00:31:14,320 --> 00:31:16,440
Speaker 3: believe that. And I'm probably going to get yelled at

669
00:31:16,440 --> 00:31:18,960
Speaker 3: for saying the number, and maybe it's a bigger number

670
00:31:19,000 --> 00:31:20,960
Speaker 3: than that, Joe, But in my mind, the way I

671
00:31:20,960 --> 00:31:22,600
Speaker 3: think about it, when I started, there was double the

672
00:31:22,640 --> 00:31:25,080
Speaker 3: amount of banks, you know, And so we're heading in

673
00:31:25,160 --> 00:31:27,600
Speaker 3: some form of that direction. Partly because of what Tracy said,

674
00:31:27,640 --> 00:31:30,760
Speaker 3: Denovo's aren't really out there to fill the need. And

675
00:31:30,800 --> 00:31:32,720
Speaker 3: there's a lot of benefits from putting a couple of

676
00:31:32,760 --> 00:31:35,520
Speaker 3: these great banks together so that they can offer a

677
00:31:35,560 --> 00:31:40,560
Speaker 3: wider scale, economies of scale, better technology, better cyber security components.

678
00:31:40,960 --> 00:31:43,240
Speaker 3: So I think you're going to see less banks, but

679
00:31:43,320 --> 00:31:46,000
Speaker 3: I think more of them will be able to battle

680
00:31:46,040 --> 00:31:48,320
Speaker 3: the largest ones if they team up a little bit.

681
00:31:48,440 --> 00:31:51,840
Speaker 1: Oh, there are some companies making a fortune basically offering

682
00:31:52,720 --> 00:31:56,720
Speaker 1: white label apps and fraud prevention services, etc. So that

683
00:31:56,760 --> 00:31:58,480
Speaker 1: these banks don't actually have to have any of that

684
00:31:58,560 --> 00:31:59,440
Speaker 1: expertise in house.

685
00:31:59,720 --> 00:32:01,480
Speaker 3: Yeah, I would tell you when you hear a lot

686
00:32:01,520 --> 00:32:04,520
Speaker 3: in our world, the fintech world. The fintech world has

687
00:32:04,560 --> 00:32:08,040
Speaker 3: been great for the community bank space because there's a

688
00:32:08,080 --> 00:32:11,280
Speaker 3: lot of teaming up right. The fintech world does a

689
00:32:11,320 --> 00:32:15,640
Speaker 3: great job creating an app, creating a mechanism that tracks

690
00:32:15,640 --> 00:32:19,560
Speaker 3: to your point that or loan origination or whatever they can.

691
00:32:19,640 --> 00:32:21,480
Speaker 3: And the banks really opened their eyes about five or

692
00:32:21,520 --> 00:32:23,320
Speaker 3: six years ago and said, we can really team up here.

693
00:32:23,360 --> 00:32:25,960
Speaker 3: We've got great balance sheets. Love to work with the

694
00:32:26,000 --> 00:32:29,880
Speaker 3: FinTechs on combining and finding the right technology again, so

695
00:32:29,960 --> 00:32:32,520
Speaker 3: I can battle the largest companies that we compete against.

696
00:32:33,680 --> 00:32:36,840
Speaker 2: Just going back to the demographics point. Is there anything

697
00:32:36,960 --> 00:32:40,440
Speaker 2: that you're seeing that's interesting on that front in terms

698
00:32:40,440 --> 00:32:45,240
Speaker 2: of banks trying to either make deposits more sticky or

699
00:32:45,560 --> 00:32:49,600
Speaker 2: maybe attract that new sort of younger base of depositors.

700
00:32:49,800 --> 00:32:54,000
Speaker 3: Right, there hasn't been anything that's been completely outside the

701
00:32:54,000 --> 00:32:55,720
Speaker 3: box that I've seen yet, and I'm always kind of

702
00:32:55,720 --> 00:32:57,840
Speaker 3: looking for one little, little anecdote. I had a couple

703
00:32:57,880 --> 00:32:59,920
Speaker 3: of years ago, maybe two years ago, three years ago now,

704
00:33:00,240 --> 00:33:02,560
Speaker 3: I remember speaking with our interns, is about thirty of them,

705
00:33:02,880 --> 00:33:05,120
Speaker 3: and I asked each one individual, I said, why do

706
00:33:05,160 --> 00:33:08,320
Speaker 3: you bank where you bank? And fifty percent of the

707
00:33:08,360 --> 00:33:11,440
Speaker 3: folks in that room, maybe sixty percent said to me, well,

708
00:33:11,480 --> 00:33:14,480
Speaker 3: I bank, were my parents bank. And so that was like, okay,

709
00:33:14,520 --> 00:33:16,600
Speaker 3: the community bank world has a chance here to try

710
00:33:16,600 --> 00:33:19,280
Speaker 3: to capture the beginning. Right, you have the beginning of it.

711
00:33:19,320 --> 00:33:20,960
Speaker 3: Do you know what the other folks were saying, Well,

712
00:33:21,000 --> 00:33:23,520
Speaker 3: my bank offers a free one year membership to Spotify.

713
00:33:24,680 --> 00:33:26,560
Speaker 3: So I googled what spot I don't know anything, right,

714
00:33:26,560 --> 00:33:29,080
Speaker 3: So I google what Spotify is and I realized it's

715
00:33:29,120 --> 00:33:31,480
Speaker 3: the same version, tracy of what we were doing twenty

716
00:33:31,520 --> 00:33:33,200
Speaker 3: thirty years ago. You remember the stories of getting a

717
00:33:33,240 --> 00:33:35,560
Speaker 3: free toaster if you opened up a check account. It's

718
00:33:35,640 --> 00:33:38,480
Speaker 3: trying to change the sort of component that leads you

719
00:33:38,560 --> 00:33:42,080
Speaker 3: to do it. But it sounded very similar to that process.

720
00:33:42,120 --> 00:33:44,400
Speaker 3: So I see some of that working things like that,

721
00:33:44,880 --> 00:33:47,120
Speaker 3: But I also think it's the education side of it.

722
00:33:47,120 --> 00:33:50,120
Speaker 3: It's offering. Your branch now is in a branch the

723
00:33:50,160 --> 00:33:51,840
Speaker 3: way we used to think of it. It's more of

724
00:33:51,880 --> 00:33:55,120
Speaker 3: a community center. It's almost like a Starbucks. Come on in,

725
00:33:55,280 --> 00:33:57,920
Speaker 3: hang out, you know, get to just spend some time here.

726
00:33:58,160 --> 00:34:00,360
Speaker 3: You'll meet other folks that are doing some business, like you.

727
00:34:00,400 --> 00:34:02,080
Speaker 3: All things like that. I'm seeing a little bit and

728
00:34:02,080 --> 00:34:03,520
Speaker 3: that tends to sometimes work as well.

729
00:34:03,640 --> 00:34:06,680
Speaker 1: With Tracy, what's the coffee shop that's like in our building?

730
00:34:06,800 --> 00:34:08,320
Speaker 4: I was just thinking about that one.

731
00:34:08,560 --> 00:34:10,759
Speaker 2: I think it is. It's like a Capital One bank

732
00:34:10,800 --> 00:34:12,560
Speaker 2: branch slash coffee shop.

733
00:34:12,719 --> 00:34:14,680
Speaker 1: Yeah, you need to go in there, and people are

734
00:34:14,680 --> 00:34:16,520
Speaker 1: in there all the time, like drinking coffee and eating

735
00:34:16,520 --> 00:34:20,120
Speaker 1: scones and you know, I guess maybe take out a mortgage.

736
00:34:20,840 --> 00:34:23,480
Speaker 1: It's like right on our blog, we should definitely go

737
00:34:23,560 --> 00:34:24,200
Speaker 1: there soon.

738
00:34:25,239 --> 00:34:27,360
Speaker 2: A field trip to the local bank brand, you know.

739
00:34:27,480 --> 00:34:31,920
Speaker 1: Tracy asked about the demographics of depositors. You told the

740
00:34:31,960 --> 00:34:35,320
Speaker 1: story of your dad on the board of a country club,

741
00:34:35,640 --> 00:34:37,759
Speaker 1: and so I have a certain image of, like what

742
00:34:37,800 --> 00:34:39,960
Speaker 1: the age of the board of a country club is,

743
00:34:40,280 --> 00:34:42,600
Speaker 1: and I have a certain image in my head of

744
00:34:42,640 --> 00:34:45,560
Speaker 1: like the type of people at banks who have relationships

745
00:34:45,560 --> 00:34:47,879
Speaker 1: with the board of a country club. Could you talk

746
00:34:47,880 --> 00:34:50,560
Speaker 1: about the demographics on the employment side of the banks

747
00:34:50,600 --> 00:34:53,440
Speaker 1: and like hiring new talent and the challenges.

748
00:34:53,000 --> 00:34:55,360
Speaker 3: There, sure, no, That's another one that I see a

749
00:34:55,400 --> 00:34:57,400
Speaker 3: lot of. And as you travel around and you know,

750
00:34:57,440 --> 00:34:59,200
Speaker 3: one of the things people will tell you one of

751
00:34:59,239 --> 00:35:02,719
Speaker 3: the drivers of M and A is succession planning. Very

752
00:35:02,840 --> 00:35:06,160
Speaker 3: very difficult to get folks to find the talent, to

753
00:35:06,200 --> 00:35:09,800
Speaker 3: find the individuals that really want to run these community banks.

754
00:35:09,800 --> 00:35:12,680
Speaker 3: So at times when you look at a deal getting done,

755
00:35:12,719 --> 00:35:16,360
Speaker 3: sometimes it's really done because from a succession planning perspective,

756
00:35:16,400 --> 00:35:18,160
Speaker 3: you'll see that more and more so, I think there's

757
00:35:18,160 --> 00:35:21,400
Speaker 3: a real challenge there both from an excitement again, I

758
00:35:21,400 --> 00:35:24,000
Speaker 3: think it goes back to you know, banks do a

759
00:35:24,040 --> 00:35:27,400
Speaker 3: great job on social media in terms of monitoring their employees.

760
00:35:27,760 --> 00:35:29,799
Speaker 3: What I think they do a terrible job of is

761
00:35:29,920 --> 00:35:32,839
Speaker 3: marketing and getting the excitement about how they're different, what

762
00:35:32,880 --> 00:35:36,840
Speaker 3: they're doing to try to attract that younger talent in

763
00:35:37,480 --> 00:35:39,880
Speaker 3: because what used to be is everyone used to go

764
00:35:39,920 --> 00:35:41,760
Speaker 3: to the top five or six banks in the country.

765
00:35:41,800 --> 00:35:44,839
Speaker 3: They great training programs, and then those individuals would leave

766
00:35:44,880 --> 00:35:47,240
Speaker 3: those training programs and go run all the community banks

767
00:35:47,239 --> 00:35:50,280
Speaker 3: in the country. They don't really have those programs anymore,

768
00:35:50,280 --> 00:35:54,040
Speaker 3: and so it's difficult. Yeah, it's difficult to find individuals

769
00:35:54,040 --> 00:35:56,120
Speaker 3: that really want as much as they used to be,

770
00:35:56,200 --> 00:35:59,000
Speaker 3: and so that is a real challenge as you think

771
00:35:59,040 --> 00:36:01,920
Speaker 3: about a growth opponent. Of most boardrooms I'm in, the

772
00:36:02,000 --> 00:36:04,520
Speaker 3: average age is on the higher side for sure, and

773
00:36:04,560 --> 00:36:07,120
Speaker 3: that makes it challenging. If you think about the demographic

774
00:36:07,160 --> 00:36:10,520
Speaker 3: overhaul we're going through, it's not just lending, it's the

775
00:36:10,560 --> 00:36:14,560
Speaker 3: deposit side that we don't. Banks don't underwrite their depositors

776
00:36:14,560 --> 00:36:16,920
Speaker 3: like they underwrite the loans, right, and we've got to

777
00:36:16,960 --> 00:36:19,759
Speaker 3: start doing that with better representation on the board of

778
00:36:19,840 --> 00:36:22,080
Speaker 3: folks that are truly going to baby try to help

779
00:36:22,120 --> 00:36:25,360
Speaker 3: you from a social media perspective, from other ways to

780
00:36:25,400 --> 00:36:28,080
Speaker 3: gather those deposits and meet them new demographic needs.

781
00:36:29,080 --> 00:36:33,160
Speaker 2: So, just going back to March's banking drama, so it

782
00:36:33,280 --> 00:36:37,319
Speaker 2: feels like some of the really extreme deposit moves have

783
00:36:37,560 --> 00:36:40,719
Speaker 2: started to moderate now, and at the same time you

784
00:36:40,800 --> 00:36:44,960
Speaker 2: have the FED coming out with potentially additional capital requirements

785
00:36:45,040 --> 00:36:48,520
Speaker 2: for larger banks. I take the point that you'll probably

786
00:36:48,520 --> 00:36:52,319
Speaker 2: see some compression on net interest margin going forward as

787
00:36:52,360 --> 00:36:55,280
Speaker 2: people have to compete with deposits. But what's the next

788
00:36:55,440 --> 00:36:59,040
Speaker 2: big I guess concern or thing that's keeping up bank

789
00:36:59,080 --> 00:37:00,040
Speaker 2: executives or your.

790
00:37:00,600 --> 00:37:02,840
Speaker 3: Sure I think it's the you know, you kind of

791
00:37:02,840 --> 00:37:04,680
Speaker 3: go from the unknown. Like you said, we're going to

792
00:37:04,719 --> 00:37:07,400
Speaker 3: have higher capital requirements which are going to drag into earnings,

793
00:37:07,400 --> 00:37:11,040
Speaker 3: which is ironic because Silicon Valley's problem wasn't capital. But anyways,

794
00:37:11,040 --> 00:37:13,520
Speaker 3: well why digress, right, But we'll we'll move forward. I

795
00:37:13,560 --> 00:37:15,880
Speaker 3: think then you start thinking about what's keeping them up

796
00:37:15,920 --> 00:37:20,439
Speaker 3: at night is the fact that perception or reality, I've

797
00:37:20,440 --> 00:37:23,960
Speaker 3: got to manage my balance sheet differently from a liquidity perspective,

798
00:37:24,200 --> 00:37:26,200
Speaker 3: and that's also going to cost money. And what I

799
00:37:26,280 --> 00:37:29,200
Speaker 3: mean by that is we used to think about and

800
00:37:29,239 --> 00:37:31,120
Speaker 3: this is a little bit in the weeds Joe and Tracy,

801
00:37:31,160 --> 00:37:33,600
Speaker 3: so I apologize, Hi, it's too much. But one of

802
00:37:33,640 --> 00:37:35,880
Speaker 3: the things we do when we project out an earning

803
00:37:35,920 --> 00:37:38,800
Speaker 3: stream of a bank based on changes and interest rates

804
00:37:38,880 --> 00:37:42,000
Speaker 3: is we have to assume how long those deposits, how

805
00:37:42,040 --> 00:37:45,400
Speaker 3: sticky they are. Right, there's no actual contractual maturity for

806
00:37:45,760 --> 00:37:47,680
Speaker 3: a lot of those. But typically what people would do

807
00:37:47,760 --> 00:37:50,640
Speaker 3: is they go back thirty years and they'd say, on averages,

808
00:37:50,920 --> 00:37:53,880
Speaker 3: a checking account lasts about seven years. So that's great.

809
00:37:53,880 --> 00:37:55,760
Speaker 3: It gives us a lot of protection in that rising

810
00:37:55,840 --> 00:37:59,000
Speaker 3: rate environment. Right in theory. The problem is the examiners

811
00:37:59,000 --> 00:38:01,000
Speaker 3: are going to come in now and say seven years.

812
00:38:01,000 --> 00:38:04,600
Speaker 3: That's historically fine. But I'm not buying into that anymore.

813
00:38:04,719 --> 00:38:06,480
Speaker 3: What I now need to look at is you can

814
00:38:06,480 --> 00:38:08,600
Speaker 3: tell me seven years, but it's also seven years with

815
00:38:08,640 --> 00:38:11,160
Speaker 3: a one day call option that those dollars can leave

816
00:38:11,200 --> 00:38:13,399
Speaker 3: out at any point in time. That puts a lot

817
00:38:13,440 --> 00:38:16,560
Speaker 3: more pressure on the types of lending you do, the

818
00:38:16,680 --> 00:38:19,839
Speaker 3: types of balance sheet you're running, which, ultimately Tracy gets

819
00:38:19,880 --> 00:38:22,200
Speaker 3: to your point, earnings again are going to be under

820
00:38:22,239 --> 00:38:25,400
Speaker 3: pressure from that perspective, and I would argue apples to

821
00:38:25,560 --> 00:38:28,120
Speaker 3: apples that Sunday night. The first thing I said to

822
00:38:28,160 --> 00:38:30,360
Speaker 3: myself when I read the press release about Signature and

823
00:38:30,360 --> 00:38:33,200
Speaker 3: Silicon Valley is I said, maybe this country only wants

824
00:38:33,200 --> 00:38:35,359
Speaker 3: to have five banks, right, you know, That's the first

825
00:38:35,360 --> 00:38:37,520
Speaker 3: thing I said to myself, because apples to apples, Tracey,

826
00:38:37,520 --> 00:38:39,080
Speaker 3: are you gonna put your money? Let's say you're the

827
00:38:39,080 --> 00:38:42,719
Speaker 3: treasure of a corporation that was banking at Silicon Valley

828
00:38:42,719 --> 00:38:45,080
Speaker 3: over that weekend you got bailed out, right, but that

829
00:38:45,200 --> 00:38:47,840
Speaker 3: Monday morning, you weren't going to your board and saying,

830
00:38:48,040 --> 00:38:50,520
Speaker 3: you know what, I'm gonna move our deposits to bank

831
00:38:50,680 --> 00:38:53,239
Speaker 3: XYZ you've never heard of. I'm going to Jamie. Now

832
00:38:53,239 --> 00:38:55,319
Speaker 3: I'm in a JP Morgan and I'm going to bank there.

833
00:38:55,360 --> 00:38:58,680
Speaker 3: And that's to me, why apples to apples. A community

834
00:38:58,680 --> 00:39:01,040
Speaker 3: bank's going to have to pay more for liquidity than

835
00:39:01,080 --> 00:39:03,200
Speaker 3: the largest banks in the country. Not that keeps them

836
00:39:03,239 --> 00:39:06,000
Speaker 3: up at night. And hedging in general, I run our

837
00:39:06,040 --> 00:39:08,040
Speaker 3: derivative business separate of some of the other things I do.

838
00:39:08,360 --> 00:39:12,120
Speaker 3: Our derivative business is skyrocketed because derivatives are used to

839
00:39:12,160 --> 00:39:14,680
Speaker 3: hedge interest rate risk, and we used to not have

840
00:39:14,800 --> 00:39:17,160
Speaker 3: to use them as much because the deposit side of

841
00:39:17,200 --> 00:39:21,640
Speaker 3: the world. Now, with this deposit concern around the optionality

842
00:39:21,719 --> 00:39:24,680
Speaker 3: risk for lack of better terms, derivative use has exploded.

843
00:39:24,680 --> 00:39:26,359
Speaker 3: I'd like to think it's because I'm really good at it.

844
00:39:26,360 --> 00:39:27,719
Speaker 3: It's not. It has nothing to do with me, and

845
00:39:27,719 --> 00:39:29,719
Speaker 3: it has everything to do with the market. And I

846
00:39:29,760 --> 00:39:32,359
Speaker 3: work on a wonderful team. But that's really what's going on.

847
00:39:32,400 --> 00:39:33,120
Speaker 3: From that perspective.

848
00:39:33,200 --> 00:39:34,799
Speaker 1: This was the missing piece because you know, we talked

849
00:39:34,800 --> 00:39:36,960
Speaker 1: to Terry Duffy. Yeah, and he's like, no, you de

850
00:39:37,000 --> 00:39:38,759
Speaker 1: have to like if you wanted to like hear about

851
00:39:38,760 --> 00:39:40,600
Speaker 1: their hedging business. They don't do it through they ce

852
00:39:40,600 --> 00:39:42,319
Speaker 1: and me. They do it through the banks. Yes, and

853
00:39:42,360 --> 00:39:44,680
Speaker 1: you're it sounds like they really were cranking it up.

854
00:39:44,920 --> 00:39:46,319
Speaker 3: One of the things I do is I go to

855
00:39:46,360 --> 00:39:48,319
Speaker 3: boards and I go to management teams. I look at

856
00:39:48,320 --> 00:39:50,360
Speaker 3: the balance you, I look at the interest rate risk position,

857
00:39:50,400 --> 00:39:53,239
Speaker 3: and I say, you have now some exposure here, let's

858
00:39:53,239 --> 00:39:54,960
Speaker 3: show you the derivative transactions. That makes sense.

859
00:39:54,960 --> 00:39:57,640
Speaker 2: Are there particular products that are getting really popular.

860
00:39:57,800 --> 00:39:59,520
Speaker 3: Yeah, I would say there's a few, and most of

861
00:39:59,560 --> 00:40:02,120
Speaker 3: them are are a lot of folks have a lot

862
00:40:02,160 --> 00:40:05,120
Speaker 3: more mortgage book. Their mortgage book is a lot bigger

863
00:40:05,120 --> 00:40:07,080
Speaker 3: than they wanted it. Right back in twenty and twenty one,

864
00:40:07,120 --> 00:40:09,680
Speaker 3: everyone has a mortgage. It's not going anywhere. So what

865
00:40:09,719 --> 00:40:11,840
Speaker 3: a lot of banks are doing is swapping that fixed

866
00:40:11,880 --> 00:40:14,960
Speaker 3: rate asset to a floating rate to reduce their interest

867
00:40:15,000 --> 00:40:18,640
Speaker 3: rate risk from a higher for longer perspective. That's one area.

868
00:40:18,719 --> 00:40:21,680
Speaker 3: The other area is on the liability side. It's the reverse,

869
00:40:21,760 --> 00:40:24,359
Speaker 3: but the same concept. They're paying fixed on interest rate,

870
00:40:24,400 --> 00:40:27,279
Speaker 3: swapping the liability side and locking up their costs on

871
00:40:27,360 --> 00:40:29,839
Speaker 3: short funding for a long period of time. Those are

872
00:40:30,000 --> 00:40:33,280
Speaker 3: very very popular transactions on the derivative front.

873
00:40:33,560 --> 00:40:35,879
Speaker 1: So I just have two questions. One is a short one,

874
00:40:36,239 --> 00:40:38,719
Speaker 1: and you were because you're talking about the flightingness of deposits.

875
00:40:39,080 --> 00:40:41,439
Speaker 1: Someone told me, like, I guess in the old days,

876
00:40:41,480 --> 00:40:43,839
Speaker 1: they're like once people are in a bank, they're more

877
00:40:43,920 --> 00:40:45,680
Speaker 1: likely to get divorced than change banks.

878
00:40:45,760 --> 00:40:46,439
Speaker 4: Is was that true?

879
00:40:46,560 --> 00:40:49,680
Speaker 3: Yes, that's why checking it gaines. We're the golden neck.

880
00:40:49,840 --> 00:40:52,800
Speaker 3: Everything else was secondary. I wanted your checking again.

881
00:40:52,640 --> 00:40:55,200
Speaker 1: And that's why it was still worth to build bank branches,

882
00:40:55,239 --> 00:40:57,200
Speaker 1: because if you just get them in the door, it's

883
00:40:57,200 --> 00:40:58,000
Speaker 1: a lifetime money.

884
00:40:58,000 --> 00:40:58,239
Speaker 4: Okay.

885
00:40:58,360 --> 00:41:00,839
Speaker 1: One last question, and it's sort of the question mark

886
00:41:00,920 --> 00:41:03,160
Speaker 1: to me, like you're like, well, maybe we'll just want

887
00:41:03,200 --> 00:41:05,480
Speaker 1: six banks in this country, but maybe in twenty years

888
00:41:05,480 --> 00:41:07,160
Speaker 1: we'll just be down to two hundred banks.

889
00:41:07,640 --> 00:41:09,399
Speaker 4: Is there the political willingness to.

890
00:41:09,400 --> 00:41:12,240
Speaker 1: Let that happen, because you know, there was concerned when SVB,

891
00:41:12,400 --> 00:41:15,400
Speaker 1: like we can't let Jamie Diamond buy it, right, And

892
00:41:15,440 --> 00:41:17,440
Speaker 1: then First Republic they did tell the JP Morgan. But

893
00:41:17,480 --> 00:41:20,040
Speaker 1: there's a whole lot of anxiety. And again, people have

894
00:41:20,239 --> 00:41:23,279
Speaker 1: politicians have a real affinity. It's kind of like, I mean,

895
00:41:23,320 --> 00:41:25,279
Speaker 1: I think it's like baked into America, right, but like

896
00:41:25,280 --> 00:41:27,319
Speaker 1: we didn't have cross state banks for a long time.

897
00:41:27,400 --> 00:41:31,040
Speaker 1: Like the distribution of banking is like kind of a

898
00:41:31,120 --> 00:41:34,200
Speaker 1: core American thing, for better or worse. So can you

899
00:41:34,239 --> 00:41:36,600
Speaker 1: talk a little bit about just sort of the regulatory

900
00:41:36,719 --> 00:41:40,840
Speaker 1: willingness to allow the consolidation that you anticipate, Will it

901
00:41:40,960 --> 00:41:41,560
Speaker 1: let it happen?

902
00:41:41,680 --> 00:41:45,000
Speaker 3: Yeah, no, great question. And it flip flops. Right one moment,

903
00:41:45,040 --> 00:41:47,120
Speaker 3: I'm reading about another deal that's not going to go through,

904
00:41:47,680 --> 00:41:50,640
Speaker 3: and they'll claim it took too long from a regulatory perspective.

905
00:41:50,640 --> 00:41:53,040
Speaker 3: But then you'll hear Yellen kind of encouraging the fact

906
00:41:53,040 --> 00:41:54,879
Speaker 3: that we're going to see a lot of a lot

907
00:41:54,880 --> 00:41:56,640
Speaker 3: of M and A. And I think you're right though,

908
00:41:56,680 --> 00:41:59,440
Speaker 3: And one of the arguments against my comment about the

909
00:41:59,440 --> 00:42:02,680
Speaker 3: amount of baks in this country is absolutely political from

910
00:42:02,719 --> 00:42:05,520
Speaker 3: You're absolutely right Joe, and it's probably why I will

911
00:42:05,560 --> 00:42:07,720
Speaker 3: I will be wrong on my number, and that's okay.

912
00:42:08,040 --> 00:42:10,880
Speaker 3: I hope I'm wrong, But in my mind, mathematically, the

913
00:42:10,880 --> 00:42:13,240
Speaker 3: way I see it, if we're really trying to compete

914
00:42:13,239 --> 00:42:16,120
Speaker 3: against folks that basically have a free blanket of there

915
00:42:16,239 --> 00:42:19,319
Speaker 3: there's no un insured deposits at the top five, what

916
00:42:19,360 --> 00:42:21,120
Speaker 3: can I do to compete against it? And that's why

917
00:42:21,160 --> 00:42:22,680
Speaker 3: I said what I said in terms of that.

918
00:42:23,880 --> 00:42:27,160
Speaker 1: Scott Hildenbrand, Piper Sandler, thank you so much for coming

919
00:42:27,200 --> 00:42:27,839
Speaker 1: on the odd last.

920
00:42:27,880 --> 00:42:29,920
Speaker 4: There's a great conversation.

921
00:42:29,760 --> 00:42:32,200
Speaker 3: Joe Tracy, Thank you both, and I appreciate everything to do.

922
00:42:32,400 --> 00:42:48,279
Speaker 1: Thank you, Tracy. I thought that was a great conversation.

923
00:42:48,440 --> 00:42:51,920
Speaker 1: And setting aside like the rate hedging and I'm glad

924
00:42:51,960 --> 00:42:53,640
Speaker 1: we finally talking the rate hedging and all of this,

925
00:42:53,800 --> 00:42:56,120
Speaker 1: Like you do you look around and you're like, how

926
00:42:56,160 --> 00:42:56,880
Speaker 1: can they compete?

927
00:42:57,480 --> 00:43:00,520
Speaker 2: Yeah, it seems tough. To Scott's point, how do you

928
00:43:00,560 --> 00:43:03,120
Speaker 2: compete against people who not only have economies of scale

929
00:43:03,160 --> 00:43:07,840
Speaker 2: but also seem to have de facto unlimited deposit insurance?

930
00:43:08,200 --> 00:43:11,080
Speaker 2: And I guess the arc of history is that the

931
00:43:11,160 --> 00:43:14,640
Speaker 2: number of banks in the US has been consolidating, but

932
00:43:15,000 --> 00:43:16,800
Speaker 2: to the beginning of the discussion and the point that

933
00:43:16,840 --> 00:43:18,760
Speaker 2: you made at the end of it. There is also

934
00:43:18,840 --> 00:43:21,680
Speaker 2: this tension where it feels like there is a big

935
00:43:21,719 --> 00:43:25,319
Speaker 2: portion of America that has this idealized version of a

936
00:43:25,320 --> 00:43:29,040
Speaker 2: community bank in its mind and there are actual benefits.

937
00:43:29,080 --> 00:43:31,719
Speaker 2: So I remember there was an FDIC study I guess

938
00:43:31,719 --> 00:43:34,040
Speaker 2: it's super out of date nowadays, but maybe ten years

939
00:43:34,080 --> 00:43:36,920
Speaker 2: ago where they talked about the proportion of small business

940
00:43:37,520 --> 00:43:40,760
Speaker 2: loans on smaller bank balance sheets versus the bigger ones.

941
00:43:40,960 --> 00:43:43,319
Speaker 2: And of course the smaller banks have a lot more

942
00:43:43,360 --> 00:43:46,799
Speaker 2: exposure to smaller businesses. That make sense, But on the

943
00:43:46,840 --> 00:43:50,600
Speaker 2: other hand, how do you compete and make money against

944
00:43:50,600 --> 00:43:53,520
Speaker 2: a JP Morgan that is spending a lot on technology

945
00:43:53,560 --> 00:43:57,319
Speaker 2: and also has these regulatory advantages, although it also has

946
00:43:57,360 --> 00:43:59,840
Speaker 2: some disadvantages in terms of capital, but still.

947
00:44:00,000 --> 00:44:02,680
Speaker 1: That's right, so it does have higher capital costs. Maybe

948
00:44:02,719 --> 00:44:04,640
Speaker 1: you solve the problem by like, yes, you have a

949
00:44:04,640 --> 00:44:07,399
Speaker 1: lot of consolidation, but then also you know the sort

950
00:44:07,400 --> 00:44:11,120
Speaker 1: of like handshaking meme of like old timey community banks

951
00:44:11,160 --> 00:44:14,000
Speaker 1: with modern FinTechs that lets you have the sort of

952
00:44:14,040 --> 00:44:16,320
Speaker 1: best of both worlds where they know the local country

953
00:44:16,320 --> 00:44:19,320
Speaker 1: club board, but they can also have like AI enabled

954
00:44:19,320 --> 00:44:19,960
Speaker 1: fraud detection.

955
00:44:20,160 --> 00:44:25,000
Speaker 2: That would truly be the ideal. I'm gonna instinctually say

956
00:44:25,120 --> 00:44:29,000
Speaker 2: it's probably more difficult to do than to just talk

957
00:44:29,040 --> 00:44:31,760
Speaker 2: about it. But Joe, we need to take a field

958
00:44:31,760 --> 00:44:34,800
Speaker 2: trip to not to the local bank branch that's below

959
00:44:34,840 --> 00:44:37,879
Speaker 2: our offices. We need to go to Lancaster, Pennsylvania, check

960
00:44:37,880 --> 00:44:39,200
Speaker 2: in with Bank of Bird and Hands.

961
00:44:39,239 --> 00:44:40,520
Speaker 4: I'd love to see what they're doing.

962
00:44:40,920 --> 00:44:42,279
Speaker 2: We should do it. Yeah, let's go.

963
00:44:42,560 --> 00:44:42,839
Speaker 4: All right?

964
00:44:42,840 --> 00:44:43,520
Speaker 2: Shall we leave it there?

965
00:44:43,560 --> 00:44:44,239
Speaker 4: Let's leave it there.

966
00:44:44,600 --> 00:44:47,480
Speaker 2: This has been another episode of the All Thoughts podcast.

967
00:44:47,560 --> 00:44:50,120
Speaker 2: I'm Tracy Alloway. You can follow me on Twitter at

968
00:44:50,160 --> 00:44:50,960
Speaker 2: Tracy Alloway.

969
00:44:51,000 --> 00:44:53,480
Speaker 1: And I'm Joe Wisenthal. You can follow me on Twitter

970
00:44:53,520 --> 00:44:57,360
Speaker 1: at the Stalwart. Follow our producers Carmen Rodriguez at Carmen

971
00:44:57,480 --> 00:45:00,640
Speaker 1: Arman and dash El Bennett at Dashbot. Check out all

972
00:45:00,680 --> 00:45:04,080
Speaker 1: of our podcasts at Bloomberg under the handle at podcasts,

973
00:45:04,160 --> 00:45:06,960
Speaker 1: and for more odd lots content, go to bloomberg dot

974
00:45:07,000 --> 00:45:09,200
Speaker 1: com slash odd lots, where we have a blog we

975
00:45:09,280 --> 00:45:12,719
Speaker 1: post transcripts in a newsletter, and check out the discord

976
00:45:12,800 --> 00:45:16,360
Speaker 1: Discord dot gg slash odd lots, where listeners are chatting

977
00:45:16,400 --> 00:45:19,359
Speaker 1: twenty four to seven about all these topics. Really fun

978
00:45:19,360 --> 00:45:19,799
Speaker 1: place to.

979
00:45:19,719 --> 00:45:22,839
Speaker 2: Hang out online and if you enjoy odd Lots, if

980
00:45:22,880 --> 00:45:26,080
Speaker 2: you like listening to conversations about the future of banking,

981
00:45:26,160 --> 00:45:29,040
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982
00:45:29,120 --> 00:45:31,920
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