WEBVTT - The Massive Shift Underway in the US Banking System 0:00:10.160 --> 0:00:14.320 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.400 --> 0:00:15.840 I'm Joe Wisenthal and. 0:00:15.800 --> 0:00:16.759 I'm Tracy Alloway. 0:00:17.160 --> 0:00:20.159 Tracy, it's been about, I guess three months or so 0:00:20.840 --> 0:00:24.480 since the s V blow up, and I don't know people, 0:00:24.560 --> 0:00:25.960 it sort of seems like a thing of the past. 0:00:26.000 --> 0:00:26.200 Now. 0:00:26.600 --> 0:00:29.000 I'm trying to remember when I went on vacation, but 0:00:29.080 --> 0:00:31.920 I guess it was March. So yeah, yeah, I guess 0:00:31.960 --> 0:00:34.480 three months. Can I ask before we start this conversation, 0:00:34.560 --> 0:00:36.479 are we going to call it a crisis or not? 0:00:36.760 --> 0:00:39.560 Because that seems to be a new terminology debate. 0:00:39.960 --> 0:00:43.600 Well, yeah, it's a good question. I'm team anti crisis. 0:00:43.640 --> 0:00:45.760 But also, I remember you were on vacation and I 0:00:45.760 --> 0:00:48.239 remember You're like, oh, got a missing a financial crisis, 0:00:48.440 --> 0:00:49.960 and I was like, no, no, it's not a crisis. 0:00:50.040 --> 0:00:51.960 Enjoy your vacation. It's not worth like. 0:00:52.240 --> 0:00:54.800 It was still the most interesting thing to have happened 0:00:54.800 --> 0:00:58.240 to banks in me, it was very interesting. All right, Well, 0:00:58.520 --> 0:01:02.600 let's let's agree to call it drama. Drama drama that works, 0:01:02.640 --> 0:01:03.440 that works for everyone. 0:01:03.560 --> 0:01:05.080 It was drama. I think that's right. 0:01:05.160 --> 0:01:07.240 And you know, after that, we you know, there were 0:01:07.240 --> 0:01:09.759 all these questions like why do we have thousands? 0:01:09.880 --> 0:01:11.280 Why do we have banks at all? 0:01:11.400 --> 0:01:13.520 But we did? We hit like an episode, So why 0:01:13.520 --> 0:01:14.640 do we have private banks? 0:01:14.640 --> 0:01:15.200 Oh that's true? 0:01:15.240 --> 0:01:15.800 Yeah we did. 0:01:16.520 --> 0:01:19.399 Yeah, why do we have private banks? Especially if the 0:01:19.440 --> 0:01:22.560 depositors can almost always be guaranteed to be bailed out? 0:01:22.880 --> 0:01:23.199 Yes? 0:01:23.319 --> 0:01:27.200 So it did raise some existential questions for banks, and 0:01:27.240 --> 0:01:29.800 one of them was the deposit insurance question that you 0:01:29.959 --> 0:01:34.120 just mentioned. But the other one was the nature or 0:01:34.160 --> 0:01:37.479 the breadth of the US banking system altogether. And this 0:01:37.520 --> 0:01:41.080 is something that I think comes up after almost every 0:01:41.400 --> 0:01:45.520 about banking drama slash crisis. You saw in the savings 0:01:45.520 --> 0:01:48.320 and loan crisis. Certainly after two thousand and eight, there 0:01:48.400 --> 0:01:51.520 was a lot of discussion about what should banks be doing. 0:01:51.680 --> 0:01:55.880 Do we need this many banks? Or are we comfortable 0:01:56.040 --> 0:01:59.360 maybe with merging some of them, consolidating them into megabanks. 0:01:59.800 --> 0:02:02.200 And now fast forward to twenty twenty three, a lot 0:02:02.200 --> 0:02:06.440 of that consolidation is happening again, and we are seeing 0:02:06.480 --> 0:02:08.480 some of these same questions raised. 0:02:08.480 --> 0:02:10.640 Right, And I guess there's like this sort of two 0:02:10.760 --> 0:02:14.080 ways of talking about consolidation. One is like, could we 0:02:14.200 --> 0:02:17.040 see the giant banks just sort of like buy everyone else? 0:02:17.800 --> 0:02:19.560 And then we sort of have like a Canada style 0:02:19.639 --> 0:02:23.200 banking system where there's like eight banks whatever, or could 0:02:23.200 --> 0:02:25.680 it be like from the depositor perspective where they're just like, 0:02:25.960 --> 0:02:27.960 why wouldn't I just put my money at JP Morgan, 0:02:28.000 --> 0:02:30.760 the ultimate too big to fail bank? And then I 0:02:30.919 --> 0:02:34.000 sleep at night and you know, and just why not? 0:02:34.200 --> 0:02:34.320 Right? 0:02:34.480 --> 0:02:36.480 And they have a good website and it works and 0:02:36.520 --> 0:02:38.480 all that stuff, and so there's just like it feels 0:02:38.560 --> 0:02:41.560 like there's all these forces put a lot of stress 0:02:41.680 --> 0:02:44.640 on the thousands and thousands of smaller community and regional 0:02:44.639 --> 0:02:45.280 banks out there. 0:02:45.400 --> 0:02:47.880 Yeah, And at the same time, you know, this idea 0:02:47.960 --> 0:02:53.160 of small local banks is kind of embedded in American psyche. 0:02:53.240 --> 0:02:57.359 I feel like, certainly, going back to It's a wonderful life, 0:02:57.560 --> 0:03:00.640 everyone casts this notion of a cozy community bank where 0:03:00.639 --> 0:03:03.519 everyone kind of knows each other and so they put 0:03:03.560 --> 0:03:07.160 some value on that. But that's not the only way 0:03:07.200 --> 0:03:09.440 to have a banking system. You could have a Canada 0:03:09.520 --> 0:03:12.000 style banking system, as you just pointed out. So all 0:03:12.040 --> 0:03:15.200 these big existential questions at the moment. 0:03:15.000 --> 0:03:16.520 And to me, a bank is just an app at 0:03:16.520 --> 0:03:19.000 this point, no, for real, Like I have a bank 0:03:19.080 --> 0:03:21.760 that does not have like physical branches that I go into. 0:03:22.000 --> 0:03:22.440 They might have. 0:03:22.600 --> 0:03:25.400 You don't have intense personal feelings for your bank? 0:03:26.480 --> 0:03:28.919 No, No, I have like it's like the app works, 0:03:28.960 --> 0:03:31.560 it doesn't crash. It's like, great, there's my bank. Anyway, 0:03:31.680 --> 0:03:34.120 So what is the future of banks and what is 0:03:34.200 --> 0:03:36.880 happening and will we have when they have a Canada 0:03:36.960 --> 0:03:39.640 style banking system. I think even though things have quieted down, 0:03:39.680 --> 0:03:41.560 it's sort of a good time. Actually, it's like take 0:03:41.600 --> 0:03:42.560 stock of what's happening. 0:03:42.600 --> 0:03:44.640 It is always a good time to talk about the 0:03:44.680 --> 0:03:46.120 meaning of banks in America. 0:03:46.200 --> 0:03:48.760 Well, I'm very excited today we have the perfect guests, 0:03:48.760 --> 0:03:51.640 someone who works directly in this space and has for 0:03:51.640 --> 0:03:54.120 a long time. We're going to be speaking with Scott Hildenbrand, 0:03:54.440 --> 0:03:58.680 chief balance sheet strategist and head of financial Strategies at 0:03:58.720 --> 0:04:01.760 Piper Sandler. Scott, thank you so much for coming in. 0:04:01.920 --> 0:04:05.000 Hey, good morning, Joe and Tracy. Thanks for inviting me in. 0:04:05.040 --> 0:04:05.640 I'm thrilled. 0:04:05.920 --> 0:04:07.800 What do we actually just start with? Like, what is 0:04:07.840 --> 0:04:11.680 a chief balance sheet strategist and head of financial strategies 0:04:11.800 --> 0:04:12.840 at Piper Sandler Time. 0:04:12.920 --> 0:04:14.320 I wish I had a nickel for every time I've 0:04:14.320 --> 0:04:16.880 gotten that question. Joe, but no, so a chief balance 0:04:16.880 --> 0:04:20.120 sheet strategist really is. I spend every day, all day, 0:04:20.120 --> 0:04:23.040 predominantly on the road, working with the community banks all 0:04:23.080 --> 0:04:25.240 throughout the country. So if you think about it, there's 0:04:25.279 --> 0:04:27.520 about a thousand community banks that come through our group. 0:04:27.560 --> 0:04:29.520 I have a team of thirty five of us, and 0:04:29.560 --> 0:04:32.520 we spend every day all day looking at bank balance 0:04:32.520 --> 0:04:35.800 sheets from an interest rate, risk perspective, a liquidity perspective, 0:04:35.839 --> 0:04:40.960 a capital perspective, an investor perspective, regulatory perspective. So think 0:04:40.960 --> 0:04:44.360 of sort of the top fifty banks and then everybody else. 0:04:44.400 --> 0:04:46.640 I sort of work with everyone else and think through 0:04:46.680 --> 0:04:49.799 on all of those issues that are certainly front and center. 0:04:49.839 --> 0:04:52.280 As you to just chat a little bit about perfect guest. 0:04:52.520 --> 0:04:55.720 So next question, how busy have you been over the 0:04:55.760 --> 0:04:56.400 past three months? 0:04:56.400 --> 0:04:58.120 You know, Tracy, it's interesting. It's the first time I 0:04:58.120 --> 0:04:59.680 think my family and friends know what I do for 0:04:59.720 --> 0:05:02.760 a liv. It has been incredibly busy, to the point 0:05:02.800 --> 0:05:05.159 where I can't even go play golf with friends without 0:05:05.160 --> 0:05:09.440 the word Silicon Valley, hedging, uninsured, all those types of 0:05:09.520 --> 0:05:11.400 terms popping up. And I do a fair amount of 0:05:11.400 --> 0:05:13.440 public speaking and a lot of people want to hear 0:05:13.440 --> 0:05:15.720 about what's going on, what are others doing and thinking 0:05:15.760 --> 0:05:18.120 about post the drama? And I love the way you 0:05:18.160 --> 0:05:20.560 all described it, the drama around the Silicon Valley, etc. 0:05:21.040 --> 0:05:23.400 Would you say, do agree was not a crisis? 0:05:23.800 --> 0:05:26.160 I do, but I think it was also. What's a 0:05:26.240 --> 0:05:29.360 lot easier for me to say that now versus when 0:05:29.400 --> 0:05:32.280 Tracy was on vacation and when it was happening that 0:05:32.720 --> 0:05:35.760 Sunday in March, when it felt pretty quickly like it 0:05:35.800 --> 0:05:38.960 was getting out of control. But I think, as you said, Joe, 0:05:39.000 --> 0:05:41.000 I think over the last three months we have seen 0:05:41.040 --> 0:05:44.120 some stabilization. I think everybody's calmed down a little bit, 0:05:44.160 --> 0:05:46.160 but there's still a lot to unpack and a lot 0:05:46.160 --> 0:05:47.000 of challenges coming. 0:05:47.320 --> 0:05:49.479 So why don't we do a little bit of looking 0:05:49.520 --> 0:05:51.880 in the rear view mirror first and then we can 0:05:51.920 --> 0:05:55.039 move on to what we've been seeing currently. But what 0:05:55.240 --> 0:05:59.120 happened in March, how would you characterize the drama that 0:05:59.200 --> 0:06:00.159 we saw or. 0:06:00.279 --> 0:06:04.120 I think what ultimately happened. And again, being an asset 0:06:04.160 --> 0:06:06.320 liability NERD that I am. All I have done for 0:06:06.360 --> 0:06:09.599 twenty three years is modeled balance sheets. So I take assets, 0:06:09.600 --> 0:06:12.159 I take the liabilities, I take changes in rates, and 0:06:12.160 --> 0:06:14.320 we try to determine the impact what happens to those 0:06:14.320 --> 0:06:16.760 balance sheets. One of the things that we were taught 0:06:16.960 --> 0:06:20.080 very early on, and almost everyone who's listening, who's ever 0:06:20.240 --> 0:06:22.800 modeled an interest rate risk for a bank, will tell 0:06:22.839 --> 0:06:25.360 you that the deposit side of the world is the 0:06:25.480 --> 0:06:28.520 ultimate hedge against higher rates. Right. And so if you 0:06:28.560 --> 0:06:30.960 had told me, Joe or Tracy five years ago you 0:06:31.000 --> 0:06:32.560 had me on here and you said, you know what, 0:06:32.640 --> 0:06:34.640 there's a bank that's all they're going to do is 0:06:34.640 --> 0:06:37.960 buy treasuries and all of their deposits are in checking accounts, 0:06:37.960 --> 0:06:39.680 and by the way, they're going to fail. I would 0:06:39.720 --> 0:06:41.279 have laughed at I would have laughed at both of you. 0:06:41.520 --> 0:06:42.920 I wouldn't have come back. I don't know, you all 0:06:42.920 --> 0:06:46.040 are crazy. So literally in March, Tracy'd answer your question, 0:06:46.080 --> 0:06:48.240 I think everything was flipped upside down. What we had 0:06:48.240 --> 0:06:51.560 all learned was the fact that operating accounts and checking 0:06:51.640 --> 0:06:54.159 accounts are great until they're not. And what we've learned 0:06:54.240 --> 0:06:57.000 also is that while it's been a slow bleed Joe 0:06:57.040 --> 0:06:59.360 and you were sort of talking about this, we finally 0:06:59.440 --> 0:07:03.800 all now really that there's really no contractual liabilities or 0:07:03.800 --> 0:07:07.080 deposits on a bank balance sheet anymore. People can move 0:07:07.120 --> 0:07:09.840 money a lot faster. Bank balance sheets are more athletic 0:07:09.880 --> 0:07:13.320 and nimble. You couple that with really what happened if 0:07:13.360 --> 0:07:16.080 you think about it too, is you think about from 0:07:16.120 --> 0:07:18.000 an M and A perspective. There was no M and 0:07:18.080 --> 0:07:21.360 A during twenty twenty and COVID for those couple of months. 0:07:21.480 --> 0:07:23.880 Yet every single bank in the country did one. They 0:07:23.920 --> 0:07:27.280 didn't realize it. They got no assets. An enormous amount 0:07:27.320 --> 0:07:30.320 of deposits were dumped into the industry. They didn't ask 0:07:30.360 --> 0:07:33.600 for it, major growth on a deposit front, interest rates 0:07:33.600 --> 0:07:36.840 at zero, and no lending anywhere. So you think about 0:07:36.880 --> 0:07:39.440 how balloons those balance sheets got. It's not like banks 0:07:39.480 --> 0:07:42.680 woke up overnight and all of a sudden became fantastically 0:07:42.680 --> 0:07:45.720 better at gathering deposits. So those balance sheets looked a 0:07:45.720 --> 0:07:48.160 lot different. And then fast forward, we were a little 0:07:48.200 --> 0:07:50.360 late to the inflation game. You go up five hundred 0:07:50.360 --> 0:07:52.640 basis points in a very short period of time. You 0:07:52.720 --> 0:07:54.880 have Twitter and the social media role here, and all 0:07:54.880 --> 0:07:58.200 of a sudden, everybody got spooked and dollars started running out, 0:07:58.480 --> 0:08:00.760 not like the WAMU days or not once what's a 0:08:00.760 --> 0:08:03.560 wonderful life it was three hours and forty two billion dollars. 0:08:03.640 --> 0:08:04.679 That's what happened. 0:08:04.760 --> 0:08:08.400 Yeah, this is kind of the dark side of the app. Yeah, yeah, 0:08:08.440 --> 0:08:11.000 it's just the flightiness of deposits. You can pull everything 0:08:11.000 --> 0:08:12.080 out with the click of a button. 0:08:12.120 --> 0:08:15.360 Now, I know, like for our listeners, and I've had 0:08:15.400 --> 0:08:18.320 to explain what is it about just for sort of 0:08:18.360 --> 0:08:21.200 like banking asset liability in the industry like one on one, 0:08:21.240 --> 0:08:23.560 probably even pre one on one. Why is it the 0:08:23.640 --> 0:08:26.040 deposits are interest rate hedge? 0:08:26.120 --> 0:08:30.520 Sure so in theory over the years, historically most of 0:08:30.600 --> 0:08:34.319 us all have checking accounts, We've got savings accounts, and predominantly, 0:08:34.360 --> 0:08:36.679 if you think about it, banks make money not because 0:08:36.679 --> 0:08:38.960 of the asset side the lending, it's because they don't 0:08:39.000 --> 0:08:43.040 pay at market rates on the deposit side. Right, checking accounts, 0:08:43.040 --> 0:08:45.240 nobody really cares what you're making on your checking account. 0:08:45.240 --> 0:08:47.000 As long as the app works, you move your money around, 0:08:47.080 --> 0:08:50.520 you're good. I think what what ultimately happened is for 0:08:50.640 --> 0:08:53.400 years and years you'll hear the term beta and it's 0:08:53.440 --> 0:08:56.480 not from an investor perspective. It's in the bank world. 0:08:56.880 --> 0:08:59.280 Everybody likes to try to project every time the FED 0:08:59.360 --> 0:09:01.600 moves how much a bank have to move their deposit 0:09:01.720 --> 0:09:04.480 rates to keep money in and forever it's kind of 0:09:04.480 --> 0:09:06.840 been this thirty to fifty percent, and I've never really 0:09:06.880 --> 0:09:09.560 subscribed to it. And that's a separate topic, but typically 0:09:09.600 --> 0:09:13.160 that's what we've seen historically. But unfortunately, what it doesn't 0:09:13.200 --> 0:09:15.840 measure is the fact that not only is it a 0:09:15.920 --> 0:09:18.040 rate that we have to pay, but dollars can move 0:09:18.400 --> 0:09:21.040 so much faster based on the technology. And I'd argue 0:09:21.040 --> 0:09:23.960 the demographics here's the bigger issue. If you think about 0:09:23.960 --> 0:09:27.040 it from an asset liability perspective, I can't model the 0:09:27.120 --> 0:09:31.120 demographic breakdown well enough. Yet you think about my father's 0:09:31.160 --> 0:09:35.120 generation versus you know, my future grandchildren's generations, and you 0:09:35.200 --> 0:09:37.200 think about how they view a bank sort of the 0:09:37.200 --> 0:09:40.080 way you all were describing it today. There's a loyalty 0:09:40.160 --> 0:09:44.160 trust matrix, and you think about the loyalty. A lot 0:09:44.160 --> 0:09:47.000 of loyalty in my father's generation and very little trust. 0:09:47.000 --> 0:09:48.920 He gets a two thousand dollars check, he is going 0:09:48.960 --> 0:09:50.840 to a branch, he is going to make sure that 0:09:50.880 --> 0:09:52.760 money is in. He gets his lollipop, he says hi, 0:09:52.840 --> 0:09:56.559 and he leaves. Then you think about the generations beneath below. 0:09:57.120 --> 0:09:59.840 There's a ton of trust. They'll move money around on 0:10:00.440 --> 0:10:01.760 they don't even know the name of the bank they're 0:10:01.800 --> 0:10:04.360 banking app. They'll move it so quickly, but there's very 0:10:04.360 --> 0:10:07.480 little loyalty. And there in lies the difference and why 0:10:07.520 --> 0:10:10.360 we're struggling with how to determine how to manage and 0:10:10.440 --> 0:10:12.559 hedge a balance sheet from a deposit perspective. 0:10:12.760 --> 0:10:14.800 Maybe the banking app should figure out a way to 0:10:14.840 --> 0:10:15.880 deliver lollipops. 0:10:16.000 --> 0:10:16.400 That's right. 0:10:17.240 --> 0:10:19.600 Can I ask another step back question, which is you 0:10:19.640 --> 0:10:22.959 know I was a banking correspondent soon after the two 0:10:22.960 --> 0:10:25.760 thousand and eight financial crisis, and I remember the big 0:10:25.840 --> 0:10:29.280 hope of banks back then was interest rates are going 0:10:29.360 --> 0:10:31.840 to rise and will finally be able to make money 0:10:32.120 --> 0:10:36.520 off of lending. What happened to that portion of it? 0:10:36.600 --> 0:10:39.160 That's the best question I've gotten around this topic over 0:10:39.200 --> 0:10:41.760 the last ninety or one hundred days, Tracy, And I'll 0:10:41.760 --> 0:10:45.000 tell you why. For if I had a nickel for 0:10:45.200 --> 0:10:48.240 every bank that told me in January of twenty twenty two, 0:10:48.360 --> 0:10:51.200 so not too long ago, that they couldn't wait for 0:10:51.280 --> 0:10:53.880 rates to rise. We were prepared for rates to rise, Scott. 0:10:53.920 --> 0:10:56.520 We're going to look so good it's coming finally. I 0:10:56.520 --> 0:10:58.880 mean I for honestly, I've been doing this twenty three years. 0:10:58.920 --> 0:11:00.720 I could have taken the first twenty years off. Everybody 0:11:00.720 --> 0:11:02.800 told me rates were going higher, they never moved right. 0:11:02.840 --> 0:11:05.040 It was very low interest rate environment for twenty years. 0:11:05.200 --> 0:11:07.640 Finally we see interest rates hied tracy and it took about, 0:11:07.679 --> 0:11:09.679 I don't know, nine months until everybody called me and 0:11:09.760 --> 0:11:12.200 said we need help pedging against higher rates. And I'm like, well, 0:11:12.240 --> 0:11:15.480 wait a minute. But ultimately, what we didn't realize, right, 0:11:15.520 --> 0:11:17.600 what we didn't facet in is the fact that, yes, 0:11:18.080 --> 0:11:20.400 when the FED hikes interest rates, and it's why you 0:11:20.440 --> 0:11:22.720 saw twenty twenty two. In the first six months, we 0:11:22.760 --> 0:11:25.800 saw great margin expansion for banks, which was phenomenal. The 0:11:25.800 --> 0:11:27.960 asset side was resetting higher, and nobody was paying up 0:11:28.000 --> 0:11:31.240 for deposits because it wasn't based on the FED. It's 0:11:31.240 --> 0:11:33.600 based on supply and demand. And we had so much 0:11:33.600 --> 0:11:36.400 supply of deposits after COVID that it took a while 0:11:36.400 --> 0:11:38.599 for anyone had to have to pay. Then all of 0:11:38.640 --> 0:11:40.440 a sudden, we had to pay. As things started to 0:11:40.480 --> 0:11:42.600 catch up, Treasury rates got a lot higher. But here's 0:11:42.600 --> 0:11:45.520 the bigger problem. Everybody was looking at their balance sheet 0:11:45.559 --> 0:11:47.360 as if it would stay the same in terms of 0:11:47.400 --> 0:11:50.679 product mix, in terms of size, and ultimately what happened 0:11:50.760 --> 0:11:52.319 is everybody said, well, wait a minute, I can move 0:11:52.360 --> 0:11:55.360 money all over the place. Not only two different banks, 0:11:55.360 --> 0:11:58.920 but banks were competing against treasury rates, right, So all 0:11:58.920 --> 0:12:01.240 of a sudden, people moved their money around a lot faster. 0:12:01.360 --> 0:12:04.360 So we always say it's not changes in rates that 0:12:04.480 --> 0:12:06.680 caused it, It was the way and how athletic bank 0:12:06.720 --> 0:12:08.800 balance youse are today versus where they used to be, 0:12:09.120 --> 0:12:11.440 and it moves a lot faster, tracy, and that's where 0:12:11.440 --> 0:12:12.560 people got caught. 0:12:12.880 --> 0:12:15.880 Just a follow up based on that, But how much 0:12:16.040 --> 0:12:19.440 of the concerns that banks tend to have are shaped 0:12:19.960 --> 0:12:23.760 by things in a stress test? So I'm thinking back, 0:12:24.200 --> 0:12:26.760 worst case scenario of the banking stress test for a 0:12:26.760 --> 0:12:30.480 long time was a recession and rates going very very low. 0:12:31.160 --> 0:12:35.640 It didn't really have much as far as I can remember, Like, 0:12:35.679 --> 0:12:39.199 there wasn't that much modeling based on rates going really 0:12:39.240 --> 0:12:43.560 really high. So does that tend to shape bank behavior? Like? 0:12:43.679 --> 0:12:46.040 Is that the scenario that they end up worrying about? 0:12:46.280 --> 0:12:48.640 This was the double whammy? You're right if you think 0:12:48.679 --> 0:12:52.120 about you know, if you pulled one hundred CEOs throughout 0:12:52.160 --> 0:12:53.839 the country and it was two years ago, even four 0:12:53.920 --> 0:12:55.520 years ago, ten years ago, and you say, what's the 0:12:55.520 --> 0:12:57.600 worst scenario, they tell you, well, rates down to zero 0:12:58.000 --> 0:13:00.920 probably means recession. We've got credit price problems, etc. That's 0:13:00.960 --> 0:13:03.480 going to be a really tough environment for us. Where 0:13:03.520 --> 0:13:07.120 I think we didn't focus enough on is really understanding 0:13:07.160 --> 0:13:11.160 the impact that both technologies social media and the demographic 0:13:11.320 --> 0:13:15.040 changes around the deposit front from a liquidity perspective in 0:13:15.040 --> 0:13:17.719 a higher rate environment. This wasn't a we got to 0:13:17.760 --> 0:13:22.760 slow the economy down from because it's booming organically. This was, Hey, 0:13:22.760 --> 0:13:25.360 we're gonna throw way more money into your industry than 0:13:25.360 --> 0:13:27.000 you asked for, and then we're gonna suck it out 0:13:27.000 --> 0:13:29.320 in record pace. And by the way, we're gonna do 0:13:29.360 --> 0:13:32.400 it over a nine month period, and hopefully you're prepared 0:13:32.440 --> 0:13:32.920 to handle that. 0:13:49.440 --> 0:13:52.280 I want to talk more about the demographics and really 0:13:52.320 --> 0:13:54.520 get these sort of like long term structural changes. But 0:13:54.559 --> 0:13:55.840 before we do, I just want to sort of like 0:13:56.360 --> 0:13:58.720 ask one more question about this sort of like post 0:13:58.880 --> 0:14:03.320 SVB environment. Like KRI the Regional bank ETF is actually 0:14:03.320 --> 0:14:06.080 still lower than it was on March thirteenth, like they've 0:14:06.080 --> 0:14:09.560 stopped spiraling. But the valuations you mentioned, I guess like 0:14:09.559 --> 0:14:11.680 deposits have been stable. But can you talk about like 0:14:11.800 --> 0:14:15.000 there has clearly been this huge repricing of the sector 0:14:15.280 --> 0:14:18.440 that has not bounced back since then. I mean it's flat, 0:14:18.520 --> 0:14:22.560 like there's not everything else is really what about this moment, 0:14:22.840 --> 0:14:26.640 either sort of perceptually or business wise, like, really has 0:14:26.800 --> 0:14:30.680 changed how people view the viability the business prospects of 0:14:30.680 --> 0:14:31.200 these banks. 0:14:31.280 --> 0:14:33.480 Right, there's well, as you know, and both M and 0:14:33.520 --> 0:14:36.800 A and invaluation unknown as a problem. Right, And so 0:14:36.840 --> 0:14:39.600 you've got a few unknowns, Joe, You've got you've got 0:14:39.800 --> 0:14:44.160 regulatory issues coming further stress more capital what is it 0:14:44.200 --> 0:14:46.600 going to be? That's obviously whatever it is, we all 0:14:46.640 --> 0:14:50.280 know it's gonna hurt earnings, right, So you've had it correct. Yes, 0:14:50.600 --> 0:14:53.600 it'll trickle down, there'll be some impacts. And then you 0:14:53.640 --> 0:14:55.520 know you also have and I talked to a lot 0:14:55.520 --> 0:14:58.800 of investors to your point, Joe, you know, almost half 0:14:58.800 --> 0:15:01.560 the banks in the country trading below their tangible book value. 0:15:01.680 --> 0:15:04.000 It's almost weird for me to say that. And we 0:15:04.080 --> 0:15:06.680 really haven't seen any credit losses yet. The problem is 0:15:07.080 --> 0:15:10.080 almost every investor I talk to, whether it's unknown around 0:15:10.080 --> 0:15:13.200 what we just talked about, the regulatory environment, or quite 0:15:13.240 --> 0:15:17.520 frankly unknown around interest rates, or the final one, you know, 0:15:17.800 --> 0:15:21.520 is unknown around credit. And I haven't met an investor 0:15:21.520 --> 0:15:24.800 that's excited about the incredit environment which we're headed into. 0:15:24.800 --> 0:15:26.960 And I think the real problem is we're sort of 0:15:27.000 --> 0:15:30.680 stuck in this nobody knows mode. I'd rather us, you know, 0:15:30.920 --> 0:15:33.920 let's take some hits here, Let's have some credit concerns 0:15:33.920 --> 0:15:36.120 and start to deal with them. We're kind of waiting 0:15:36.200 --> 0:15:38.480 and waiting for the hurricane, but it hasn't come, and 0:15:38.520 --> 0:15:40.680 it might not be a major hurricane, it might be small. 0:15:40.720 --> 0:15:43.720 We just don't know, and so from evaluation perspective, it's 0:15:43.720 --> 0:15:45.800 tough for anyone to invest in anything from that perspective. 0:15:45.840 --> 0:15:48.440 And just real quickly the deposits have settled down. 0:15:48.480 --> 0:15:48.800 Correct. 0:15:48.960 --> 0:15:53.200 Okay, So Joe mentioned that KBW Regional Bank Index. Can 0:15:53.240 --> 0:15:55.840 you talk a little bit more about the differentiation that 0:15:55.880 --> 0:15:59.400 we've seen between the big banks, so the JP Morgan's 0:15:59.400 --> 0:16:02.520 of the world, which seem to have been massive beneficiaries 0:16:02.600 --> 0:16:05.920 of these liquidity issues, the regionals and then the really 0:16:06.080 --> 0:16:08.960 small community banks, Because I think a lot of the 0:16:08.960 --> 0:16:12.880 community banks ended up getting lumped up in the regional category. 0:16:12.920 --> 0:16:15.720 But actually they seem to do okay. 0:16:16.080 --> 0:16:19.040 Right, And I think the biggest challenge right now is 0:16:19.080 --> 0:16:20.600 exactly the way you lay it out. If you think 0:16:20.640 --> 0:16:23.600 about it, the largest banks in the country rely a 0:16:23.640 --> 0:16:27.560 lot less on deposit in loan out right. They make 0:16:27.560 --> 0:16:29.800 a spread, but they don't live and die by their 0:16:29.840 --> 0:16:33.440 spread business. The smaller tracy the bank you get to, 0:16:33.920 --> 0:16:36.880 the more they rely on spread business, and that's a 0:16:36.920 --> 0:16:39.600 problem when you've got an inverted yield curve. You've got 0:16:39.640 --> 0:16:43.880 deposit costs continue to elevate. They've stabilized, Joe A to 0:16:43.880 --> 0:16:47.040 your earlier point, They've stabilized from a balance perspective, but 0:16:47.080 --> 0:16:49.680 I don't believe we stabilized yet on how much it 0:16:49.760 --> 0:16:52.680 costs me to keep people here, or the concern around 0:16:52.680 --> 0:16:54.480 how much I'm going to cost to keep people here. 0:16:54.560 --> 0:16:57.920 So you've got margin compression for the smaller institutions who 0:16:57.920 --> 0:17:00.760 have very little fee income. You think of out JP Morgan, 0:17:00.760 --> 0:17:03.080 They've got revenues all over the place in all different 0:17:03.120 --> 0:17:05.880 business lines. You go down to the smallest community banks 0:17:05.880 --> 0:17:08.399 in the country, and they live and die by depositing 0:17:08.840 --> 0:17:12.400 loan out, make the spread, manage that spread, and pay 0:17:12.440 --> 0:17:14.439 for everything they need to pay for. So that's the 0:17:14.480 --> 0:17:18.200 simplistic view, Tracy of the differences as you go down, 0:17:18.240 --> 0:17:22.960 there's obviously some others as well. Scale here is unfortunately 0:17:23.200 --> 0:17:25.280 playing a game, going to play a large role in 0:17:25.320 --> 0:17:27.679 the game. Excuse me as we think about it. I 0:17:27.760 --> 0:17:29.680 sound like an investment banker in that that leads to 0:17:29.800 --> 0:17:31.480 M and A. But it's really true if you think 0:17:31.520 --> 0:17:35.040 about scale in a world that I think across the board, 0:17:35.560 --> 0:17:38.600 bank margins will continue to be lower apples to apples 0:17:38.640 --> 0:17:41.000 in any rate environment because we're probably going to have 0:17:41.040 --> 0:17:43.080 to hold a little more aquidity, probably got to hold 0:17:43.119 --> 0:17:45.640 a little bit more capital, and certainly having the rear 0:17:45.720 --> 0:17:48.360 view mirror of what happened at Silicon Valley. Yet Tracy, 0:17:48.400 --> 0:17:51.240 to your point, there's maybe five banks that look like 0:17:51.280 --> 0:17:54.080 Silicon Valley out of four thousand. Yet the others are 0:17:54.080 --> 0:17:56.080 going to pay for some of that as well, and 0:17:56.080 --> 0:17:56.840 that's hard. 0:17:57.080 --> 0:17:57.320 You know. 0:17:57.880 --> 0:18:00.679 Right around the time of Silicon I think like I 0:18:00.680 --> 0:18:02.520 did a little bit of traveling. Tracy and I were 0:18:02.560 --> 0:18:05.240 in Chicago, for example. Not long after that, I went 0:18:05.280 --> 0:18:07.880 to like a wedding in Boston, and the only reason 0:18:07.960 --> 0:18:09.719 I bring that up is like when you're in a 0:18:09.760 --> 0:18:12.720 new area, I find you just see all these banks 0:18:12.760 --> 0:18:16.119 you've never heard of, these like tiny local banks. Like 0:18:16.200 --> 0:18:18.399 you know, I'm probably making it up, but it's like 0:18:18.440 --> 0:18:21.919 the like you know, the Medford Community Savings Bank outside 0:18:21.960 --> 0:18:24.760 of Boston, and the sort of you know, Third Bank 0:18:24.800 --> 0:18:27.560 of Illinois, and just all these like branches talk to 0:18:27.640 --> 0:18:31.800 us about like essentially sitting aside rate compression. 0:18:31.359 --> 0:18:32.320 And rates go up and down. 0:18:32.440 --> 0:18:34.160 We don't really know what the future like this sort 0:18:34.160 --> 0:18:37.399 of like operating business these days that they're in and 0:18:37.440 --> 0:18:40.040 the sort of challenge they have of like bringing in 0:18:40.080 --> 0:18:43.200 new depositors for a local bank. Again, when I could 0:18:43.240 --> 0:18:45.600 just like go on you know, job dot com. 0:18:45.640 --> 0:18:47.600 You're right, Joe, And and it's one of the things 0:18:47.680 --> 0:18:49.280 I do too. It's just I happen to know all 0:18:49.320 --> 0:18:51.000 those banks as I travel around, but it's the same 0:18:51.000 --> 0:18:53.360 and I'm like, oh, that's what that's located. But as 0:18:53.400 --> 0:18:56.000 you think about their their business, right, yeah, all of 0:18:56.040 --> 0:18:59.040 those smaller banks, most of those smaller banks was started 0:18:59.480 --> 0:19:03.240 in the commun unity folks at the schools, at the churches, 0:19:03.400 --> 0:19:06.240 at the country club started this bank in town, and 0:19:06.280 --> 0:19:08.640 everybody kind of banked in that town, and you think 0:19:08.680 --> 0:19:10.720 about that worked for a long period of time. Back 0:19:10.720 --> 0:19:13.000 to that loyalty trust component, there was a lot of 0:19:13.000 --> 0:19:15.879 loyalty to who you banked with. You fast forward to 0:19:16.000 --> 0:19:19.560 sort of where we are today, and you think about 0:19:19.119 --> 0:19:23.200 the demographic changes. You think about ten, fifteen, twenty years ago, 0:19:23.320 --> 0:19:25.600 Joe a bank balance sheet, the community bank world had 0:19:25.640 --> 0:19:29.040 almost half of its deposits were in CDs. I bring 0:19:29.119 --> 0:19:31.160 that up because if you think about it, that gave 0:19:31.440 --> 0:19:33.800 banks time. You have a one year CD on your 0:19:33.800 --> 0:19:36.240 balance sheet. Rates don't move on those deposits for a year, 0:19:36.320 --> 0:19:38.840 no matter what rates are doing. You fast forward to 0:19:38.840 --> 0:19:41.560 where we are today and you think about two things. 0:19:41.560 --> 0:19:43.720 The average age of a CD holder is a lot 0:19:43.800 --> 0:19:47.399 higher than you would guess at almost any institution in 0:19:47.400 --> 0:19:47.840 the country. 0:19:47.960 --> 0:19:50.200 Clus the youngest person who even owns the CD of 0:19:50.240 --> 0:19:51.000 the United States. 0:19:51.040 --> 0:19:53.000 I'm looking for that individuals. I want to know who 0:19:53.000 --> 0:19:56.080 it is. But you're right, it is really that demographic 0:19:56.119 --> 0:19:59.200 has changed. But that's a really important point because as 0:19:59.320 --> 0:20:02.000 banks are trying to grow deposits, they're out there trying 0:20:02.040 --> 0:20:04.600 to reach in CD world. Yet I do a fair 0:20:04.600 --> 0:20:07.200 amount of interviewing for folks that originally Sandor orneil Nolt, 0:20:07.200 --> 0:20:09.080 Piper Sandler want to come to New York learn about 0:20:09.080 --> 0:20:11.439 community banking and way smarter than I am. And they 0:20:11.440 --> 0:20:13.320 ask me questions I can answer, but I always have 0:20:13.359 --> 0:20:15.000 a question they can't answer. Do you know what a 0:20:15.040 --> 0:20:17.240 CD is? And they've never heard of it, whether it 0:20:17.320 --> 0:20:19.679 was banking or music. And yet then I'll go to 0:20:19.680 --> 0:20:21.480 the next boardroom. I'm in the next bank of the Sey. 0:20:21.520 --> 0:20:23.000 Now we're gonna fill the liquidity hole. We're going to 0:20:23.000 --> 0:20:25.439 go out and run a fifteen month CD special. The 0:20:25.520 --> 0:20:28.720 game has changed, the demographics have changed. People want CD 0:20:28.840 --> 0:20:33.560 rates with money market flexibility and operational flexibility. And that 0:20:33.680 --> 0:20:37.440 is the biggest dynamic we're seeing for the smaller community banks. 0:20:37.440 --> 0:20:40.240 And that's what happened. Back to Tracy's earlier question, the 0:20:40.320 --> 0:20:43.280 deposit world and how much we can hedge with the 0:20:43.320 --> 0:20:46.439 deposits is going away quickly. Without those CDs, we have 0:20:46.440 --> 0:20:49.680 no contractual liabilities on most bank balance sheets anymore. 0:20:50.200 --> 0:20:52.639 On the deposit beta point. I mean, there are some 0:20:52.880 --> 0:20:57.119 banks out there that are offering very competitive rates, at 0:20:57.160 --> 0:21:00.679 least compared to others, and you are the perfect person 0:21:00.880 --> 0:21:04.280 to answer this question, But what are they doing that 0:21:04.440 --> 0:21:08.200 others are not. And you know, I get that scale 0:21:08.359 --> 0:21:10.440 is a factor here. So if you if you're big, 0:21:10.560 --> 0:21:13.800 you can maybe afford to return a little bit more 0:21:13.840 --> 0:21:17.560 to depositors. But maybe for some of the non megabanks, 0:21:17.760 --> 0:21:20.520 is it risk your lending? Right? 0:21:20.560 --> 0:21:23.840 Great question, And most of it comes honestly tracy from 0:21:23.920 --> 0:21:27.040 supply demand. And what I mean by that is if 0:21:27.080 --> 0:21:29.280 you go and did a scan of one of them, 0:21:29.400 --> 0:21:31.280 and it's a very high level metric, but one of 0:21:31.320 --> 0:21:33.000 the metrics I love to look at for banks in 0:21:33.040 --> 0:21:36.080 the countries loan to deposit ratio. And when you start 0:21:36.119 --> 0:21:39.040 seeing that number get closer and closer than ninety percent, 0:21:39.080 --> 0:21:41.919 then up to one hundred percent, you better bet that 0:21:42.000 --> 0:21:44.280 those institutions that's where you want to keep your money, 0:21:44.280 --> 0:21:46.480 because they're going to pay. They're going to pay whatever 0:21:46.560 --> 0:21:49.240 they have to pay to keep money in there, both 0:21:49.240 --> 0:21:52.199 from a liquidity metric a regulatory metric to keep that 0:21:52.280 --> 0:21:55.320 loan to deposit ratio within reason so that they're not 0:21:55.359 --> 0:21:57.919 an outlier, right. And so you're seeing a little bit 0:21:58.000 --> 0:22:00.520 of that, you're seeing a little bit of quite frankly, 0:22:01.000 --> 0:22:03.000 most banks will tell me right now they're willing to 0:22:03.000 --> 0:22:05.840 pay those you see those today, I was in Chicago. 0:22:05.880 --> 0:22:07.800 I was at an airport head of the airport, and 0:22:07.840 --> 0:22:09.639 on my car ride this morning, I saw a CD 0:22:09.720 --> 0:22:12.600 for five thirty five. I thought to myself, the same thing. 0:22:12.640 --> 0:22:14.920 Does that mean a typical bank margins three and a 0:22:14.960 --> 0:22:17.920 half percent? Are they putting on loans at nine percent? 0:22:18.359 --> 0:22:21.959 Most banks aren't or they're you know, so it begs 0:22:22.000 --> 0:22:24.719 the question of you're going to see margin compression. I 0:22:24.760 --> 0:22:26.720 think I've never met a bank that told me they're 0:22:26.720 --> 0:22:28.560 going to be less than assets next year than they 0:22:28.600 --> 0:22:30.240 are this year. I think you're going to meet a 0:22:30.280 --> 0:22:31.399 lot of new banks that are going to be a 0:22:31.400 --> 0:22:34.320 lot smaller than they were a year ago, because all 0:22:34.359 --> 0:22:37.119 of a sudden doesn't make a ton of sense financially. 0:22:37.400 --> 0:22:39.880 But right now we're still stabilizing and willing to pay 0:22:39.960 --> 0:22:41.879 up a little bit. But over time, Tracy, as that 0:22:41.920 --> 0:22:44.480 stabilizes those rates, I expect them to start to come 0:22:44.520 --> 0:22:47.679 down a little bit because I don't see loans catching 0:22:47.800 --> 0:22:50.320 up and making the equivalent yields that you need to. 0:22:51.119 --> 0:22:54.040 Can we talk about sort of non interest costs for 0:22:54.119 --> 0:22:56.399 the bank, and I'm thinking, you know, there's a million 0:22:56.520 --> 0:23:00.360 stories that we've probably run about JP Moore and going 0:23:00.359 --> 0:23:03.359 out and hiring a thousand people who understand artificial intelligence 0:23:03.480 --> 0:23:06.120 right now, you know, it's like and like, I again, 0:23:06.160 --> 0:23:10.280 I imagine that like Cambridge Community Bankcorp. Is not an attractive 0:23:10.320 --> 0:23:15.159 place for an AI expert or with But like you know, like, 0:23:15.200 --> 0:23:16.760 what is that going to mean about the sort of 0:23:16.800 --> 0:23:20.639 like product gap that exists between these megabanks that have 0:23:20.760 --> 0:23:23.120 like huge tech teams and the local. 0:23:23.320 --> 0:23:26.040 Yeah, that that by far keeps I think a lot 0:23:26.040 --> 0:23:28.600 of bank CEOs that we're talking about today he or 0:23:28.600 --> 0:23:31.720 she up at night because the gap is widening. Right, 0:23:31.800 --> 0:23:35.680 The gap continues to widen. And it's not even the technology, 0:23:36.080 --> 0:23:39.359 it's the combination of the technology and your users. Right. 0:23:39.400 --> 0:23:42.960 You think about the average demographic again going back to 0:23:43.200 --> 0:23:46.600 how much more in demand those technology skills and tools 0:23:46.640 --> 0:23:49.959 are for a bank to offer, both for hiring and 0:23:50.119 --> 0:23:54.040 also to gather deposits, gather customers, and so that is 0:23:54.080 --> 0:23:57.479 an enormous cost. That and fraud are two of the 0:23:57.520 --> 0:23:59.240 biggest costs for banks today. 0:23:59.240 --> 0:24:02.639 It's talk about fraud and how that manifest is a 0:24:02.680 --> 0:24:03.080 cost for. 0:24:03.000 --> 0:24:05.680 Those Sure, I mean you think about it, and you know, 0:24:05.880 --> 0:24:08.400 if you've ever gotten a text from your bank saying, hey, 0:24:08.480 --> 0:24:11.520 we just noticed you paid you know somewhere and you're 0:24:11.560 --> 0:24:13.480 not even in that state. We took care of it 0:24:13.520 --> 0:24:14.800 for you, and then they have to go work it 0:24:14.800 --> 0:24:16.520 out and try to go get it back. They're not 0:24:16.520 --> 0:24:19.080 getting every dollar back. That's just a cost of doing 0:24:19.119 --> 0:24:21.879 business in the bank world. You combine that with margin 0:24:21.880 --> 0:24:24.240 compression on your real business, how much you got to 0:24:24.280 --> 0:24:27.159 pay for technology to get talent and the technology in there, 0:24:27.160 --> 0:24:31.200 and it's another big drag on earnings overall at the institution. 0:24:31.960 --> 0:24:34.760 So I remember a lot of these themes from the 0:24:34.800 --> 0:24:37.439 post two thousand and eight banking environment, and there was 0:24:37.480 --> 0:24:41.080 this big question of, well, why would anyone start a bank? 0:24:41.760 --> 0:24:46.480 Because we have higher regulation, we had sluggish economic growth 0:24:46.560 --> 0:24:49.879 at that time. The tech spend was already an issue, 0:24:49.960 --> 0:24:53.119 the idea that while opening up brick and mortar bank 0:24:53.200 --> 0:24:57.520 branches is very expensive, we can't do that anymore. Is 0:24:57.560 --> 0:25:02.000 there a bowl case for starting a bank nowadays? And 0:25:02.359 --> 0:25:04.399 I remember again post two thousand and eight. I think 0:25:04.440 --> 0:25:06.480 there was one bank that opened in like twenty ten, 0:25:06.640 --> 0:25:10.400 and then one new bank, Denovo Bank in twenty thirteen, 0:25:10.600 --> 0:25:13.000 and I went to see it. It was this little 0:25:13.119 --> 0:25:17.320 Amish bank in Lancaster County in Pennsylvania called Bank of Birdenhad, 0:25:17.400 --> 0:25:20.800 and it was honestly the most adorable bank that I've 0:25:20.800 --> 0:25:22.200 ever seen anyway. 0:25:22.560 --> 0:25:25.080 Side note, well, that's one of the big things that 0:25:25.640 --> 0:25:28.000 I like. Just using the word, the word Denovo. We 0:25:28.000 --> 0:25:30.440 don't say it anymore. Right, It's tough tracy from an 0:25:30.440 --> 0:25:33.480 investor perspective to say I'm going to I'm going to 0:25:33.560 --> 0:25:35.680 start a bank, when on earth am I going to 0:25:35.720 --> 0:25:36.480 get my money back? 0:25:36.800 --> 0:25:36.960 Right? 0:25:37.000 --> 0:25:40.080 It's going to take a lot longer than it did ten, well, fifteen, 0:25:40.119 --> 0:25:42.480 twenty years ago. Now I'm getting older. That's part of 0:25:42.480 --> 0:25:45.200 the problem. You're not seeing a lot of the Denovo 0:25:45.320 --> 0:25:48.840 world because, both from a regulatory perspective and just apples 0:25:48.880 --> 0:25:52.520 to apples, earnings for banks on average are going to 0:25:52.560 --> 0:25:55.080 be harder and harder to come by, which again just 0:25:55.119 --> 0:25:57.320 makes the return longer and longer. And folks say, I 0:25:57.359 --> 0:25:59.720 could go invest in something else and probably get my 0:25:59.720 --> 0:26:02.239 money back a lot faster. Because we used to look 0:26:02.280 --> 0:26:05.520 at the stats M and A, this is an interesting component. 0:26:05.720 --> 0:26:08.080 M and A really never changes in terms of how 0:26:08.080 --> 0:26:10.199 many banks sell a year over a twenty twenty five 0:26:10.280 --> 0:26:13.120 year period, but for half of that timeframe, we had 0:26:13.119 --> 0:26:16.199 a lot of denovos. Now we don't, and that's why 0:26:16.280 --> 0:26:19.320 you're seeing the shrinking of the size of the banks 0:26:19.359 --> 0:26:20.639 a lot more. Even though M and A is in 0:26:20.680 --> 0:26:23.119 a little bit of a rain delay right now. Denovos 0:26:23.119 --> 0:26:25.760 are tough to come by, tough to get people excited about. 0:26:26.119 --> 0:26:28.239 Once in a while, though, you'll see some pop up 0:26:28.280 --> 0:26:31.440 and you hear some people talking today around you know, look, 0:26:31.480 --> 0:26:33.800 now I'm not at Silicon Valley. I'm a JP Morgan, 0:26:34.119 --> 0:26:36.720 and I'm just a number, and so there is still 0:26:36.760 --> 0:26:39.360 the relationship side. Is there a way to marry the 0:26:39.400 --> 0:26:42.399 technology and the and the relationship. Sorry interrupt you, Joe. 0:26:42.520 --> 0:26:43.600 No that's great, But no you didn't. 0:26:43.840 --> 0:26:46.040 I was interrupting you, but it's because you sort of 0:26:46.080 --> 0:26:49.560 anticipated my next question. So, like, community banks strike me 0:26:49.600 --> 0:26:52.240 as one of those things like mom and apple pie 0:26:52.240 --> 0:26:54.600 in baseball, which is like everyone loves the idea of 0:26:54.640 --> 0:26:58.400 the community bank, right, and politicians. You know, my understanding 0:26:58.480 --> 0:27:01.119 is that actually in DC, the community banks are like 0:27:01.160 --> 0:27:04.280 pretty well represented, and that politicians like to make sure 0:27:04.280 --> 0:27:07.520 it's like, you know, well, my bank and my constituents banked, 0:27:07.520 --> 0:27:10.200 and Tulsa get the same treatment as the fantasy in 0:27:10.200 --> 0:27:10.600 New York. 0:27:10.520 --> 0:27:11.399 Banks and all that stuff. 0:27:11.640 --> 0:27:14.040 What would be lost in terms of like what is 0:27:14.080 --> 0:27:17.360 different about community banks in terms of both the relationships 0:27:17.440 --> 0:27:19.600 but also like their asset mix and the type of 0:27:19.640 --> 0:27:23.639 business that they do that goes away if they have 0:27:23.720 --> 0:27:25.520 trouble remaining robust business. 0:27:25.600 --> 0:27:27.479 I think we've got a great example of it. And 0:27:27.520 --> 0:27:30.080 it was so many other things going on, Joe, that 0:27:30.160 --> 0:27:32.560 we didn't maybe notice it all the way. I give 0:27:32.640 --> 0:27:36.719 such tremendous credit to the community bank space during COVID 0:27:37.480 --> 0:27:40.879 because if you think about how quickly they they reacted 0:27:41.400 --> 0:27:43.440 on the triple P and were able to get out 0:27:43.480 --> 0:27:47.440 and meet their customers' needs at a very, very challenging time. 0:27:47.480 --> 0:27:49.119 It was a short window of challenge, right, but it 0:27:49.160 --> 0:27:52.560 was a very scary time in terms of the small 0:27:52.600 --> 0:27:56.040 business side of the world be being helped out. And 0:27:56.080 --> 0:27:59.000 the largest bank said, we understand what you want us 0:27:59.000 --> 0:28:01.680 to do, but we remember and how much I got 0:28:01.680 --> 0:28:03.720 in trouble for getting involved in this, so we're gonna 0:28:03.760 --> 0:28:06.840 slow play it a little bit. Whereas the small community banks, 0:28:07.160 --> 0:28:08.960 I'm telling you, I was really proud to know a 0:28:08.960 --> 0:28:10.800 lot of them. I had a friend call me who 0:28:10.800 --> 0:28:13.800 said his father ran a business, a small business. He said, Hey, 0:28:13.800 --> 0:28:16.200 could you get my dad, he banks at XYZ bank? 0:28:16.240 --> 0:28:18.400 Could you actually get him in touch with I called 0:28:18.400 --> 0:28:20.439 the treasure. We made the connection, he got his money, 0:28:20.600 --> 0:28:23.280 and it just felt really good that there was that dynamic. 0:28:23.359 --> 0:28:25.840 So I think there's something there, Joe that I think 0:28:25.920 --> 0:28:29.640 banks do a great job of executing their helping their clients. 0:28:29.800 --> 0:28:31.240 They do a poor job marketing. 0:28:32.240 --> 0:28:35.040 Is there something I mean, I think that's a great example. 0:28:35.160 --> 0:28:38.760 Is there something in the asset side or the loan side, 0:28:38.760 --> 0:28:41.800 whether there are's still like whether it's real estate, certain 0:28:41.880 --> 0:28:44.920 types of real estate transactions, maybe like medium and small 0:28:44.960 --> 0:28:46.080 business type loans. 0:28:46.120 --> 0:28:48.040 Like that's like I want to know, build a little. 0:28:47.760 --> 0:28:51.200 Factory and where actually there's like a clear advantage to 0:28:51.320 --> 0:28:53.960 like the local bank that knows the space, because that's 0:28:54.000 --> 0:28:55.960 like the theoretical idea, they know the community and they 0:28:55.960 --> 0:28:57.720 can do this. But like talk to us about how 0:28:57.720 --> 0:28:59.560 that actually how that plays out. 0:28:59.600 --> 0:29:02.080 Sure it plays out a lot, and I'll tell you 0:29:02.160 --> 0:29:05.200 the asset side is really becoming where banks can try 0:29:05.200 --> 0:29:08.720 to differentiate themselves on service and relationship and knowing the community. 0:29:09.440 --> 0:29:11.440 I know my dad's on a board of a country 0:29:11.440 --> 0:29:13.640 club and he's probably embarrassed I'm even talking about it, 0:29:13.640 --> 0:29:15.960 But he was telling me how the bank that was 0:29:16.000 --> 0:29:17.720 serving the country code I want to do some work 0:29:17.760 --> 0:29:19.160 and wanted to get a loan, but the loan was 0:29:19.200 --> 0:29:21.200 like two or three million dollars, and they think that's 0:29:21.240 --> 0:29:23.800 a lot of money to a large bank. That's almost 0:29:23.880 --> 0:29:26.480 not worth the time, the risk, the headline risk. He said, 0:29:26.520 --> 0:29:30.040 there was two or three small community banks willing, hustling, 0:29:30.200 --> 0:29:32.520 wanting to be helpful, know the market really well. And 0:29:32.560 --> 0:29:35.000 so that's a great example. Again, I just think the 0:29:35.120 --> 0:29:38.800 nimble and athleticness of a community bank versus the largest 0:29:38.880 --> 0:29:41.239 is really one of the advantages that are there that 0:29:41.240 --> 0:29:43.240 they need to play up more. They do a better 0:29:43.320 --> 0:29:50.440 job at that. I think. 0:30:00.920 --> 0:30:05.880 Okay, so smaller banks might have better relationships, might do 0:30:05.960 --> 0:30:08.600 a better job of small business lending or supporting the 0:30:08.600 --> 0:30:12.320 individual community. The big banks have economies of scale that 0:30:12.440 --> 0:30:16.600 make it possible to earn a relatively decent return at 0:30:16.640 --> 0:30:20.640 various times. I'm going to ask the big question, but 0:30:20.800 --> 0:30:24.640 putting it all together, what does the ideal banking system 0:30:24.840 --> 0:30:28.120 in the US actually look like? How should we balance 0:30:28.200 --> 0:30:30.040 the small banks with the bank? Yeah? 0:30:30.120 --> 0:30:33.880 Great, great question, and again, it's a very difficult one 0:30:33.920 --> 0:30:36.880 to answer, you know, spot on, Tracy, But my own gut, 0:30:36.960 --> 0:30:39.640 my own kind of experience. If we're at four thousand 0:30:39.640 --> 0:30:43.240 banks right now, we're probably heading somewhere towards. I was 0:30:43.240 --> 0:30:44.920 talking about some of the last night, maybe a couple 0:30:44.960 --> 0:30:48.200 of hundred banks over the next ten to fifteen years. 0:30:48.360 --> 0:30:51.160 And I think there's room for the largest, and I 0:30:51.200 --> 0:30:53.880 think there's room for the community bank world. And maybe 0:30:53.920 --> 0:30:55.560 I'm being a little light, Yeah. 0:30:55.400 --> 0:30:57.240 We might only have a couple of hundred banks. 0:30:57.400 --> 0:31:00.160 I'm thinking over the next fifteen to twenty years, and 0:31:00.480 --> 0:31:02.160 I think what you're going to see or you're going 0:31:02.200 --> 0:31:05.960 to see great bankers merging together to really start creating 0:31:06.080 --> 0:31:10.280 more of the mid size, smaller regionals that can deliver 0:31:10.440 --> 0:31:14.320 better service and have more economies of scale. I really 0:31:14.320 --> 0:31:16.440 believe that. And I'm probably going to get yelled at 0:31:16.440 --> 0:31:18.960 for saying the number, and maybe it's a bigger number 0:31:19.000 --> 0:31:20.960 than that, Joe, But in my mind, the way I 0:31:20.960 --> 0:31:22.600 think about it, when I started, there was double the 0:31:22.640 --> 0:31:25.080 amount of banks, you know, And so we're heading in 0:31:25.160 --> 0:31:27.600 some form of that direction. Partly because of what Tracy said, 0:31:27.640 --> 0:31:30.760 Denovo's aren't really out there to fill the need. And 0:31:30.800 --> 0:31:32.720 there's a lot of benefits from putting a couple of 0:31:32.760 --> 0:31:35.520 these great banks together so that they can offer a 0:31:35.560 --> 0:31:40.560 wider scale, economies of scale, better technology, better cyber security components. 0:31:40.960 --> 0:31:43.240 So I think you're going to see less banks, but 0:31:43.320 --> 0:31:46.000 I think more of them will be able to battle 0:31:46.040 --> 0:31:48.320 the largest ones if they team up a little bit. 0:31:48.440 --> 0:31:51.840 Oh, there are some companies making a fortune basically offering 0:31:52.720 --> 0:31:56.720 white label apps and fraud prevention services, etc. So that 0:31:56.760 --> 0:31:58.480 these banks don't actually have to have any of that 0:31:58.560 --> 0:31:59.440 expertise in house. 0:31:59.720 --> 0:32:01.480 Yeah, I would tell you when you hear a lot 0:32:01.520 --> 0:32:04.520 in our world, the fintech world. The fintech world has 0:32:04.560 --> 0:32:08.040 been great for the community bank space because there's a 0:32:08.080 --> 0:32:11.280 lot of teaming up right. The fintech world does a 0:32:11.320 --> 0:32:15.640 great job creating an app, creating a mechanism that tracks 0:32:15.640 --> 0:32:19.560 to your point that or loan origination or whatever they can. 0:32:19.640 --> 0:32:21.480 And the banks really opened their eyes about five or 0:32:21.520 --> 0:32:23.320 six years ago and said, we can really team up here. 0:32:23.360 --> 0:32:25.960 We've got great balance sheets. Love to work with the 0:32:26.000 --> 0:32:29.880 FinTechs on combining and finding the right technology again, so 0:32:29.960 --> 0:32:32.520 I can battle the largest companies that we compete against. 0:32:33.680 --> 0:32:36.840 Just going back to the demographics point. Is there anything 0:32:36.960 --> 0:32:40.440 that you're seeing that's interesting on that front in terms 0:32:40.440 --> 0:32:45.240 of banks trying to either make deposits more sticky or 0:32:45.560 --> 0:32:49.600 maybe attract that new sort of younger base of depositors. 0:32:49.800 --> 0:32:54.000 Right, there hasn't been anything that's been completely outside the 0:32:54.000 --> 0:32:55.720 box that I've seen yet, and I'm always kind of 0:32:55.720 --> 0:32:57.840 looking for one little, little anecdote. I had a couple 0:32:57.880 --> 0:32:59.920 of years ago, maybe two years ago, three years ago now, 0:33:00.240 --> 0:33:02.560 I remember speaking with our interns, is about thirty of them, 0:33:02.880 --> 0:33:05.120 and I asked each one individual, I said, why do 0:33:05.160 --> 0:33:08.320 you bank where you bank? And fifty percent of the 0:33:08.360 --> 0:33:11.440 folks in that room, maybe sixty percent said to me, well, 0:33:11.480 --> 0:33:14.480 I bank, were my parents bank. And so that was like, okay, 0:33:14.520 --> 0:33:16.600 the community bank world has a chance here to try 0:33:16.600 --> 0:33:19.280 to capture the beginning. Right, you have the beginning of it. 0:33:19.320 --> 0:33:20.960 Do you know what the other folks were saying, Well, 0:33:21.000 --> 0:33:23.520 my bank offers a free one year membership to Spotify. 0:33:24.680 --> 0:33:26.560 So I googled what spot I don't know anything, right, 0:33:26.560 --> 0:33:29.080 So I google what Spotify is and I realized it's 0:33:29.120 --> 0:33:31.480 the same version, tracy of what we were doing twenty 0:33:31.520 --> 0:33:33.200 thirty years ago. You remember the stories of getting a 0:33:33.240 --> 0:33:35.560 free toaster if you opened up a check account. It's 0:33:35.640 --> 0:33:38.480 trying to change the sort of component that leads you 0:33:38.560 --> 0:33:42.080 to do it. But it sounded very similar to that process. 0:33:42.120 --> 0:33:44.400 So I see some of that working things like that, 0:33:44.880 --> 0:33:47.120 But I also think it's the education side of it. 0:33:47.120 --> 0:33:50.120 It's offering. Your branch now is in a branch the 0:33:50.160 --> 0:33:51.840 way we used to think of it. It's more of 0:33:51.880 --> 0:33:55.120 a community center. It's almost like a Starbucks. Come on in, 0:33:55.280 --> 0:33:57.920 hang out, you know, get to just spend some time here. 0:33:58.160 --> 0:34:00.360 You'll meet other folks that are doing some business, like you. 0:34:00.400 --> 0:34:02.080 All things like that. I'm seeing a little bit and 0:34:02.080 --> 0:34:03.520 that tends to sometimes work as well. 0:34:03.640 --> 0:34:06.680 With Tracy, what's the coffee shop that's like in our building? 0:34:06.800 --> 0:34:08.320 I was just thinking about that one. 0:34:08.560 --> 0:34:10.759 I think it is. It's like a Capital One bank 0:34:10.800 --> 0:34:12.560 branch slash coffee shop. 0:34:12.719 --> 0:34:14.680 Yeah, you need to go in there, and people are 0:34:14.680 --> 0:34:16.520 in there all the time, like drinking coffee and eating 0:34:16.520 --> 0:34:20.120 scones and you know, I guess maybe take out a mortgage. 0:34:20.840 --> 0:34:23.480 It's like right on our blog, we should definitely go 0:34:23.560 --> 0:34:24.200 there soon. 0:34:25.239 --> 0:34:27.360 A field trip to the local bank brand, you know. 0:34:27.480 --> 0:34:31.920 Tracy asked about the demographics of depositors. You told the 0:34:31.960 --> 0:34:35.320 story of your dad on the board of a country club, 0:34:35.640 --> 0:34:37.759 and so I have a certain image of, like what 0:34:37.800 --> 0:34:39.960 the age of the board of a country club is, 0:34:40.280 --> 0:34:42.600 and I have a certain image in my head of 0:34:42.640 --> 0:34:45.560 like the type of people at banks who have relationships 0:34:45.560 --> 0:34:47.879 with the board of a country club. Could you talk 0:34:47.880 --> 0:34:50.560 about the demographics on the employment side of the banks 0:34:50.600 --> 0:34:53.440 and like hiring new talent and the challenges. 0:34:53.000 --> 0:34:55.360 There, sure, no, That's another one that I see a 0:34:55.400 --> 0:34:57.400 lot of. And as you travel around and you know, 0:34:57.440 --> 0:34:59.200 one of the things people will tell you one of 0:34:59.239 --> 0:35:02.719 the drivers of M and A is succession planning. Very 0:35:02.840 --> 0:35:06.160 very difficult to get folks to find the talent, to 0:35:06.200 --> 0:35:09.800 find the individuals that really want to run these community banks. 0:35:09.800 --> 0:35:12.680 So at times when you look at a deal getting done, 0:35:12.719 --> 0:35:16.360 sometimes it's really done because from a succession planning perspective, 0:35:16.400 --> 0:35:18.160 you'll see that more and more so, I think there's 0:35:18.160 --> 0:35:21.400 a real challenge there both from an excitement again, I 0:35:21.400 --> 0:35:24.000 think it goes back to you know, banks do a 0:35:24.040 --> 0:35:27.400 great job on social media in terms of monitoring their employees. 0:35:27.760 --> 0:35:29.799 What I think they do a terrible job of is 0:35:29.920 --> 0:35:32.839 marketing and getting the excitement about how they're different, what 0:35:32.880 --> 0:35:36.840 they're doing to try to attract that younger talent in 0:35:37.480 --> 0:35:39.880 because what used to be is everyone used to go 0:35:39.920 --> 0:35:41.760 to the top five or six banks in the country. 0:35:41.800 --> 0:35:44.839 They great training programs, and then those individuals would leave 0:35:44.880 --> 0:35:47.240 those training programs and go run all the community banks 0:35:47.239 --> 0:35:50.280 in the country. They don't really have those programs anymore, 0:35:50.280 --> 0:35:54.040 and so it's difficult. Yeah, it's difficult to find individuals 0:35:54.040 --> 0:35:56.120 that really want as much as they used to be, 0:35:56.200 --> 0:35:59.000 and so that is a real challenge as you think 0:35:59.040 --> 0:36:01.920 about a growth opponent. Of most boardrooms I'm in, the 0:36:02.000 --> 0:36:04.520 average age is on the higher side for sure, and 0:36:04.560 --> 0:36:07.120 that makes it challenging. If you think about the demographic 0:36:07.160 --> 0:36:10.520 overhaul we're going through, it's not just lending, it's the 0:36:10.560 --> 0:36:14.560 deposit side that we don't. Banks don't underwrite their depositors 0:36:14.560 --> 0:36:16.920 like they underwrite the loans, right, and we've got to 0:36:16.960 --> 0:36:19.759 start doing that with better representation on the board of 0:36:19.840 --> 0:36:22.080 folks that are truly going to baby try to help 0:36:22.120 --> 0:36:25.360 you from a social media perspective, from other ways to 0:36:25.400 --> 0:36:28.080 gather those deposits and meet them new demographic needs. 0:36:29.080 --> 0:36:33.160 So, just going back to March's banking drama, so it 0:36:33.280 --> 0:36:37.319 feels like some of the really extreme deposit moves have 0:36:37.560 --> 0:36:40.719 started to moderate now, and at the same time you 0:36:40.800 --> 0:36:44.960 have the FED coming out with potentially additional capital requirements 0:36:45.040 --> 0:36:48.520 for larger banks. I take the point that you'll probably 0:36:48.520 --> 0:36:52.319 see some compression on net interest margin going forward as 0:36:52.360 --> 0:36:55.280 people have to compete with deposits. But what's the next 0:36:55.440 --> 0:36:59.040 big I guess concern or thing that's keeping up bank 0:36:59.080 --> 0:37:00.040 executives or your. 0:37:00.600 --> 0:37:02.840 Sure I think it's the you know, you kind of 0:37:02.840 --> 0:37:04.680 go from the unknown. Like you said, we're going to 0:37:04.719 --> 0:37:07.400 have higher capital requirements which are going to drag into earnings, 0:37:07.400 --> 0:37:11.040 which is ironic because Silicon Valley's problem wasn't capital. But anyways, 0:37:11.040 --> 0:37:13.520 well why digress, right, But we'll we'll move forward. I 0:37:13.560 --> 0:37:15.880 think then you start thinking about what's keeping them up 0:37:15.920 --> 0:37:20.439 at night is the fact that perception or reality, I've 0:37:20.440 --> 0:37:23.960 got to manage my balance sheet differently from a liquidity perspective, 0:37:24.200 --> 0:37:26.200 and that's also going to cost money. And what I 0:37:26.280 --> 0:37:29.200 mean by that is we used to think about and 0:37:29.239 --> 0:37:31.120 this is a little bit in the weeds Joe and Tracy, 0:37:31.160 --> 0:37:33.600 so I apologize, Hi, it's too much. But one of 0:37:33.640 --> 0:37:35.880 the things we do when we project out an earning 0:37:35.920 --> 0:37:38.800 stream of a bank based on changes and interest rates 0:37:38.880 --> 0:37:42.000 is we have to assume how long those deposits, how 0:37:42.040 --> 0:37:45.400 sticky they are. Right, there's no actual contractual maturity for 0:37:45.760 --> 0:37:47.680 a lot of those. But typically what people would do 0:37:47.760 --> 0:37:50.640 is they go back thirty years and they'd say, on averages, 0:37:50.920 --> 0:37:53.880 a checking account lasts about seven years. So that's great. 0:37:53.880 --> 0:37:55.760 It gives us a lot of protection in that rising 0:37:55.840 --> 0:37:59.000 rate environment. Right in theory. The problem is the examiners 0:37:59.000 --> 0:38:01.000 are going to come in now and say seven years. 0:38:01.000 --> 0:38:04.600 That's historically fine. But I'm not buying into that anymore. 0:38:04.719 --> 0:38:06.480 What I now need to look at is you can 0:38:06.480 --> 0:38:08.600 tell me seven years, but it's also seven years with 0:38:08.640 --> 0:38:11.160 a one day call option that those dollars can leave 0:38:11.200 --> 0:38:13.399 out at any point in time. That puts a lot 0:38:13.440 --> 0:38:16.560 more pressure on the types of lending you do, the 0:38:16.680 --> 0:38:19.839 types of balance sheet you're running, which, ultimately Tracy gets 0:38:19.880 --> 0:38:22.200 to your point, earnings again are going to be under 0:38:22.239 --> 0:38:25.400 pressure from that perspective, and I would argue apples to 0:38:25.560 --> 0:38:28.120 apples that Sunday night. The first thing I said to 0:38:28.160 --> 0:38:30.360 myself when I read the press release about Signature and 0:38:30.360 --> 0:38:33.200 Silicon Valley is I said, maybe this country only wants 0:38:33.200 --> 0:38:35.359 to have five banks, right, you know, That's the first 0:38:35.360 --> 0:38:37.520 thing I said to myself, because apples to apples, Tracey, 0:38:37.520 --> 0:38:39.080 are you gonna put your money? Let's say you're the 0:38:39.080 --> 0:38:42.719 treasure of a corporation that was banking at Silicon Valley 0:38:42.719 --> 0:38:45.080 over that weekend you got bailed out, right, but that 0:38:45.200 --> 0:38:47.840 Monday morning, you weren't going to your board and saying, 0:38:48.040 --> 0:38:50.520 you know what, I'm gonna move our deposits to bank 0:38:50.680 --> 0:38:53.239 XYZ you've never heard of. I'm going to Jamie. Now 0:38:53.239 --> 0:38:55.319 I'm in a JP Morgan and I'm going to bank there. 0:38:55.360 --> 0:38:58.680 And that's to me, why apples to apples. A community 0:38:58.680 --> 0:39:01.040 bank's going to have to pay more for liquidity than 0:39:01.080 --> 0:39:03.200 the largest banks in the country. Not that keeps them 0:39:03.239 --> 0:39:06.000 up at night. And hedging in general, I run our 0:39:06.040 --> 0:39:08.040 derivative business separate of some of the other things I do. 0:39:08.360 --> 0:39:12.120 Our derivative business is skyrocketed because derivatives are used to 0:39:12.160 --> 0:39:14.680 hedge interest rate risk, and we used to not have 0:39:14.800 --> 0:39:17.160 to use them as much because the deposit side of 0:39:17.200 --> 0:39:21.640 the world. Now, with this deposit concern around the optionality 0:39:21.719 --> 0:39:24.680 risk for lack of better terms, derivative use has exploded. 0:39:24.680 --> 0:39:26.359 I'd like to think it's because I'm really good at it. 0:39:26.360 --> 0:39:27.719 It's not. It has nothing to do with me, and 0:39:27.719 --> 0:39:29.719 it has everything to do with the market. And I 0:39:29.760 --> 0:39:32.359 work on a wonderful team. But that's really what's going on. 0:39:32.400 --> 0:39:33.120 From that perspective. 0:39:33.200 --> 0:39:34.799 This was the missing piece because you know, we talked 0:39:34.800 --> 0:39:36.960 to Terry Duffy. Yeah, and he's like, no, you de 0:39:37.000 --> 0:39:38.759 have to like if you wanted to like hear about 0:39:38.760 --> 0:39:40.600 their hedging business. They don't do it through they ce 0:39:40.600 --> 0:39:42.319 and me. They do it through the banks. Yes, and 0:39:42.360 --> 0:39:44.680 you're it sounds like they really were cranking it up. 0:39:44.920 --> 0:39:46.319 One of the things I do is I go to 0:39:46.360 --> 0:39:48.319 boards and I go to management teams. I look at 0:39:48.320 --> 0:39:50.360 the balance you, I look at the interest rate risk position, 0:39:50.400 --> 0:39:53.239 and I say, you have now some exposure here, let's 0:39:53.239 --> 0:39:54.960 show you the derivative transactions. That makes sense. 0:39:54.960 --> 0:39:57.640 Are there particular products that are getting really popular. 0:39:57.800 --> 0:39:59.520 Yeah, I would say there's a few, and most of 0:39:59.560 --> 0:40:02.120 them are are a lot of folks have a lot 0:40:02.160 --> 0:40:05.120 more mortgage book. Their mortgage book is a lot bigger 0:40:05.120 --> 0:40:07.080 than they wanted it. Right back in twenty and twenty one, 0:40:07.120 --> 0:40:09.680 everyone has a mortgage. It's not going anywhere. So what 0:40:09.719 --> 0:40:11.840 a lot of banks are doing is swapping that fixed 0:40:11.880 --> 0:40:14.960 rate asset to a floating rate to reduce their interest 0:40:15.000 --> 0:40:18.640 rate risk from a higher for longer perspective. That's one area. 0:40:18.719 --> 0:40:21.680 The other area is on the liability side. It's the reverse, 0:40:21.760 --> 0:40:24.359 but the same concept. They're paying fixed on interest rate, 0:40:24.400 --> 0:40:27.279 swapping the liability side and locking up their costs on 0:40:27.360 --> 0:40:29.839 short funding for a long period of time. Those are 0:40:30.000 --> 0:40:33.280 very very popular transactions on the derivative front. 0:40:33.560 --> 0:40:35.879 So I just have two questions. One is a short one, 0:40:36.239 --> 0:40:38.719 and you were because you're talking about the flightingness of deposits. 0:40:39.080 --> 0:40:41.439 Someone told me, like, I guess in the old days, 0:40:41.480 --> 0:40:43.839 they're like once people are in a bank, they're more 0:40:43.920 --> 0:40:45.680 likely to get divorced than change banks. 0:40:45.760 --> 0:40:46.439 Is was that true? 0:40:46.560 --> 0:40:49.680 Yes, that's why checking it gaines. We're the golden neck. 0:40:49.840 --> 0:40:52.800 Everything else was secondary. I wanted your checking again. 0:40:52.640 --> 0:40:55.200 And that's why it was still worth to build bank branches, 0:40:55.239 --> 0:40:57.200 because if you just get them in the door, it's 0:40:57.200 --> 0:40:58.000 a lifetime money. 0:40:58.000 --> 0:40:58.239 Okay. 0:40:58.360 --> 0:41:00.839 One last question, and it's sort of the question mark 0:41:00.920 --> 0:41:03.160 to me, like you're like, well, maybe we'll just want 0:41:03.200 --> 0:41:05.480 six banks in this country, but maybe in twenty years 0:41:05.480 --> 0:41:07.160 we'll just be down to two hundred banks. 0:41:07.640 --> 0:41:09.399 Is there the political willingness to. 0:41:09.400 --> 0:41:12.240 Let that happen, because you know, there was concerned when SVB, 0:41:12.400 --> 0:41:15.400 like we can't let Jamie Diamond buy it, right, And 0:41:15.440 --> 0:41:17.440 then First Republic they did tell the JP Morgan. But 0:41:17.480 --> 0:41:20.040 there's a whole lot of anxiety. And again, people have 0:41:20.239 --> 0:41:23.279 politicians have a real affinity. It's kind of like, I mean, 0:41:23.320 --> 0:41:25.279 I think it's like baked into America, right, but like 0:41:25.280 --> 0:41:27.319 we didn't have cross state banks for a long time. 0:41:27.400 --> 0:41:31.040 Like the distribution of banking is like kind of a 0:41:31.120 --> 0:41:34.200 core American thing, for better or worse. So can you 0:41:34.239 --> 0:41:36.600 talk a little bit about just sort of the regulatory 0:41:36.719 --> 0:41:40.840 willingness to allow the consolidation that you anticipate, Will it 0:41:40.960 --> 0:41:41.560 let it happen? 0:41:41.680 --> 0:41:45.000 Yeah, no, great question. And it flip flops. Right one moment, 0:41:45.040 --> 0:41:47.120 I'm reading about another deal that's not going to go through, 0:41:47.680 --> 0:41:50.640 and they'll claim it took too long from a regulatory perspective. 0:41:50.640 --> 0:41:53.040 But then you'll hear Yellen kind of encouraging the fact 0:41:53.040 --> 0:41:54.879 that we're going to see a lot of a lot 0:41:54.880 --> 0:41:56.640 of M and A. And I think you're right though, 0:41:56.680 --> 0:41:59.440 And one of the arguments against my comment about the 0:41:59.440 --> 0:42:02.680 amount of baks in this country is absolutely political from 0:42:02.719 --> 0:42:05.520 You're absolutely right Joe, and it's probably why I will 0:42:05.560 --> 0:42:07.720 I will be wrong on my number, and that's okay. 0:42:08.040 --> 0:42:10.880 I hope I'm wrong, But in my mind, mathematically, the 0:42:10.880 --> 0:42:13.240 way I see it, if we're really trying to compete 0:42:13.239 --> 0:42:16.120 against folks that basically have a free blanket of there 0:42:16.239 --> 0:42:19.319 there's no un insured deposits at the top five, what 0:42:19.360 --> 0:42:21.120 can I do to compete against it? And that's why 0:42:21.160 --> 0:42:22.680 I said what I said in terms of that. 0:42:23.880 --> 0:42:27.160 Scott Hildenbrand, Piper Sandler, thank you so much for coming 0:42:27.200 --> 0:42:27.839 on the odd last. 0:42:27.880 --> 0:42:29.920 There's a great conversation. 0:42:29.760 --> 0:42:32.200 Joe Tracy, Thank you both, and I appreciate everything to do. 0:42:32.400 --> 0:42:48.279 Thank you, Tracy. I thought that was a great conversation. 0:42:48.440 --> 0:42:51.920 And setting aside like the rate hedging and I'm glad 0:42:51.960 --> 0:42:53.640 we finally talking the rate hedging and all of this, 0:42:53.800 --> 0:42:56.120 Like you do you look around and you're like, how 0:42:56.160 --> 0:42:56.880 can they compete? 0:42:57.480 --> 0:43:00.520 Yeah, it seems tough. To Scott's point, how do you 0:43:00.560 --> 0:43:03.120 compete against people who not only have economies of scale 0:43:03.160 --> 0:43:07.840 but also seem to have de facto unlimited deposit insurance? 0:43:08.200 --> 0:43:11.080 And I guess the arc of history is that the 0:43:11.160 --> 0:43:14.640 number of banks in the US has been consolidating, but 0:43:15.000 --> 0:43:16.800 to the beginning of the discussion and the point that 0:43:16.840 --> 0:43:18.760 you made at the end of it. There is also 0:43:18.840 --> 0:43:21.680 this tension where it feels like there is a big 0:43:21.719 --> 0:43:25.319 portion of America that has this idealized version of a 0:43:25.320 --> 0:43:29.040 community bank in its mind and there are actual benefits. 0:43:29.080 --> 0:43:31.719 So I remember there was an FDIC study I guess 0:43:31.719 --> 0:43:34.040 it's super out of date nowadays, but maybe ten years 0:43:34.080 --> 0:43:36.920 ago where they talked about the proportion of small business 0:43:37.520 --> 0:43:40.760 loans on smaller bank balance sheets versus the bigger ones. 0:43:40.960 --> 0:43:43.319 And of course the smaller banks have a lot more 0:43:43.360 --> 0:43:46.799 exposure to smaller businesses. That make sense, But on the 0:43:46.840 --> 0:43:50.600 other hand, how do you compete and make money against 0:43:50.600 --> 0:43:53.520 a JP Morgan that is spending a lot on technology 0:43:53.560 --> 0:43:57.319 and also has these regulatory advantages, although it also has 0:43:57.360 --> 0:43:59.840 some disadvantages in terms of capital, but still. 0:44:00.000 --> 0:44:02.680 That's right, so it does have higher capital costs. Maybe 0:44:02.719 --> 0:44:04.640 you solve the problem by like, yes, you have a 0:44:04.640 --> 0:44:07.399 lot of consolidation, but then also you know the sort 0:44:07.400 --> 0:44:11.120 of like handshaking meme of like old timey community banks 0:44:11.160 --> 0:44:14.000 with modern FinTechs that lets you have the sort of 0:44:14.040 --> 0:44:16.320 best of both worlds where they know the local country 0:44:16.320 --> 0:44:19.320 club board, but they can also have like AI enabled 0:44:19.320 --> 0:44:19.960 fraud detection. 0:44:20.160 --> 0:44:25.000 That would truly be the ideal. I'm gonna instinctually say 0:44:25.120 --> 0:44:29.000 it's probably more difficult to do than to just talk 0:44:29.040 --> 0:44:31.760 about it. But Joe, we need to take a field 0:44:31.760 --> 0:44:34.800 trip to not to the local bank branch that's below 0:44:34.840 --> 0:44:37.879 our offices. We need to go to Lancaster, Pennsylvania, check 0:44:37.880 --> 0:44:39.200 in with Bank of Bird and Hands. 0:44:39.239 --> 0:44:40.520 I'd love to see what they're doing. 0:44:40.920 --> 0:44:42.279 We should do it. Yeah, let's go. 0:44:42.560 --> 0:44:42.839 All right? 0:44:42.840 --> 0:44:43.520 Shall we leave it there? 0:44:43.560 --> 0:44:44.239 Let's leave it there. 0:44:44.600 --> 0:44:47.480 This has been another episode of the All Thoughts podcast. 0:44:47.560 --> 0:44:50.120 I'm Tracy Alloway. You can follow me on Twitter at 0:44:50.160 --> 0:44:50.960 Tracy Alloway. 0:44:51.000 --> 0:44:53.480 And I'm Joe Wisenthal. You can follow me on Twitter 0:44:53.520 --> 0:44:57.360 at the Stalwart. Follow our producers Carmen Rodriguez at Carmen 0:44:57.480 --> 0:45:00.640 Arman and dash El Bennett at Dashbot. 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