Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and.
Speaker 2: I'm Tracy Alloway.
Speaker 1: Tracy, it's been about, I guess three months or so
Speaker 1: since the s V blow up, and I don't know people,
Speaker 1: it sort of seems like a thing of the past.
Speaker 3: Now.
Speaker 2: I'm trying to remember when I went on vacation, but
Speaker 2: I guess it was March. So yeah, yeah, I guess
Speaker 2: three months. Can I ask before we start this conversation,
Speaker 2: are we going to call it a crisis or not?
Speaker 2: Because that seems to be a new terminology debate.
Speaker 1: Well, yeah, it's a good question. I'm team anti crisis.
Speaker 1: But also, I remember you were on vacation and I
Speaker 1: remember You're like, oh, got a missing a financial crisis,
Speaker 1: and I was like, no, no, it's not a crisis.
Speaker 4: Enjoy your vacation. It's not worth like.
Speaker 2: It was still the most interesting thing to have happened
Speaker 2: to banks in me, it was very interesting. All right, Well,
Speaker 2: let's let's agree to call it drama. Drama drama that works,
Speaker 2: that works for everyone.
Speaker 4: It was drama. I think that's right.
Speaker 1: And you know, after that, we you know, there were
Speaker 1: all these questions like why do we have thousands?
Speaker 2: Why do we have banks at all?
Speaker 4: But we did? We hit like an episode, So why
Speaker 4: do we have private banks?
Speaker 2: Oh that's true?
Speaker 4: Yeah we did.
Speaker 1: Yeah, why do we have private banks? Especially if the
Speaker 1: depositors can almost always be guaranteed to be bailed out?
Speaker 3: Yes?
Speaker 2: So it did raise some existential questions for banks, and
Speaker 2: one of them was the deposit insurance question that you
Speaker 2: just mentioned. But the other one was the nature or
Speaker 2: the breadth of the US banking system altogether. And this
Speaker 2: is something that I think comes up after almost every
Speaker 2: about banking drama slash crisis. You saw in the savings
Speaker 2: and loan crisis. Certainly after two thousand and eight, there
Speaker 2: was a lot of discussion about what should banks be doing.
Speaker 2: Do we need this many banks? Or are we comfortable
Speaker 2: maybe with merging some of them, consolidating them into megabanks.
Speaker 2: And now fast forward to twenty twenty three, a lot
Speaker 2: of that consolidation is happening again, and we are seeing
Speaker 2: some of these same questions raised.
Speaker 1: Right, And I guess there's like this sort of two
Speaker 1: ways of talking about consolidation. One is like, could we
Speaker 1: see the giant banks just sort of like buy everyone else?
Speaker 1: And then we sort of have like a Canada style
Speaker 1: banking system where there's like eight banks whatever, or could
Speaker 1: it be like from the depositor perspective where they're just like,
Speaker 1: why wouldn't I just put my money at JP Morgan,
Speaker 1: the ultimate too big to fail bank? And then I
Speaker 1: sleep at night and you know, and just why not?
Speaker 3: Right?
Speaker 1: And they have a good website and it works and
Speaker 1: all that stuff, and so there's just like it feels
Speaker 1: like there's all these forces put a lot of stress
Speaker 1: on the thousands and thousands of smaller community and regional
Speaker 1: banks out there.
Speaker 2: Yeah, And at the same time, you know, this idea
Speaker 2: of small local banks is kind of embedded in American psyche.
Speaker 2: I feel like, certainly, going back to It's a wonderful life,
Speaker 2: everyone casts this notion of a cozy community bank where
Speaker 2: everyone kind of knows each other and so they put
Speaker 2: some value on that. But that's not the only way
Speaker 2: to have a banking system. You could have a Canada
Speaker 2: style banking system, as you just pointed out. So all
Speaker 2: these big existential questions at the moment.
Speaker 1: And to me, a bank is just an app at
Speaker 1: this point, no, for real, Like I have a bank
Speaker 1: that does not have like physical branches that I go into.
Speaker 3: They might have.
Speaker 2: You don't have intense personal feelings for your bank?
Speaker 1: No, No, I have like it's like the app works,
Speaker 1: it doesn't crash. It's like, great, there's my bank. Anyway,
Speaker 1: So what is the future of banks and what is
Speaker 1: happening and will we have when they have a Canada
Speaker 1: style banking system. I think even though things have quieted down,
Speaker 1: it's sort of a good time. Actually, it's like take
Speaker 1: stock of what's happening.
Speaker 2: It is always a good time to talk about the
Speaker 2: meaning of banks in America.
Speaker 1: Well, I'm very excited today we have the perfect guests,
Speaker 1: someone who works directly in this space and has for
Speaker 1: a long time. We're going to be speaking with Scott Hildenbrand,
Speaker 1: chief balance sheet strategist and head of financial Strategies at
Speaker 1: Piper Sandler. Scott, thank you so much for coming in.
Speaker 3: Hey, good morning, Joe and Tracy. Thanks for inviting me in.
Speaker 3: I'm thrilled.
Speaker 1: What do we actually just start with? Like, what is
Speaker 1: a chief balance sheet strategist and head of financial strategies
Speaker 1: at Piper Sandler Time.
Speaker 3: I wish I had a nickel for every time I've
Speaker 3: gotten that question. Joe, but no, so a chief balance
Speaker 3: sheet strategist really is. I spend every day, all day,
Speaker 3: predominantly on the road, working with the community banks all
Speaker 3: throughout the country. So if you think about it, there's
Speaker 3: about a thousand community banks that come through our group.
Speaker 3: I have a team of thirty five of us, and
Speaker 3: we spend every day all day looking at bank balance
Speaker 3: sheets from an interest rate, risk perspective, a liquidity perspective,
Speaker 3: a capital perspective, an investor perspective, regulatory perspective. So think
Speaker 3: of sort of the top fifty banks and then everybody else.
Speaker 3: I sort of work with everyone else and think through
Speaker 3: on all of those issues that are certainly front and center.
Speaker 3: As you to just chat a little bit about perfect guest.
Speaker 2: So next question, how busy have you been over the
Speaker 2: past three months?
Speaker 3: You know, Tracy, it's interesting. It's the first time I
Speaker 3: think my family and friends know what I do for
Speaker 3: a liv. It has been incredibly busy, to the point
Speaker 3: where I can't even go play golf with friends without
Speaker 3: the word Silicon Valley, hedging, uninsured, all those types of
Speaker 3: terms popping up. And I do a fair amount of
Speaker 3: public speaking and a lot of people want to hear
Speaker 3: about what's going on, what are others doing and thinking
Speaker 3: about post the drama? And I love the way you
Speaker 3: all described it, the drama around the Silicon Valley, etc.
Speaker 4: Would you say, do agree was not a crisis?
Speaker 3: I do, but I think it was also. What's a
Speaker 3: lot easier for me to say that now versus when
Speaker 3: Tracy was on vacation and when it was happening that
Speaker 3: Sunday in March, when it felt pretty quickly like it
Speaker 3: was getting out of control. But I think, as you said, Joe,
Speaker 3: I think over the last three months we have seen
Speaker 3: some stabilization. I think everybody's calmed down a little bit,
Speaker 3: but there's still a lot to unpack and a lot
Speaker 3: of challenges coming.
Speaker 2: So why don't we do a little bit of looking
Speaker 2: in the rear view mirror first and then we can
Speaker 2: move on to what we've been seeing currently. But what
Speaker 2: happened in March, how would you characterize the drama that
Speaker 2: we saw or.
Speaker 3: I think what ultimately happened. And again, being an asset
Speaker 3: liability NERD that I am. All I have done for
Speaker 3: twenty three years is modeled balance sheets. So I take assets,
Speaker 3: I take the liabilities, I take changes in rates, and
Speaker 3: we try to determine the impact what happens to those
Speaker 3: balance sheets. One of the things that we were taught
Speaker 3: very early on, and almost everyone who's listening, who's ever
Speaker 3: modeled an interest rate risk for a bank, will tell
Speaker 3: you that the deposit side of the world is the
Speaker 3: ultimate hedge against higher rates. Right. And so if you
Speaker 3: had told me, Joe or Tracy five years ago you
Speaker 3: had me on here and you said, you know what,
Speaker 3: there's a bank that's all they're going to do is
Speaker 3: buy treasuries and all of their deposits are in checking accounts,
Speaker 3: and by the way, they're going to fail. I would
Speaker 3: have laughed at I would have laughed at both of you.
Speaker 3: I wouldn't have come back. I don't know, you all
Speaker 3: are crazy. So literally in March, Tracy'd answer your question,
Speaker 3: I think everything was flipped upside down. What we had
Speaker 3: all learned was the fact that operating accounts and checking
Speaker 3: accounts are great until they're not. And what we've learned
Speaker 3: also is that while it's been a slow bleed Joe
Speaker 3: and you were sort of talking about this, we finally
Speaker 3: all now really that there's really no contractual liabilities or
Speaker 3: deposits on a bank balance sheet anymore. People can move
Speaker 3: money a lot faster. Bank balance sheets are more athletic
Speaker 3: and nimble. You couple that with really what happened if
Speaker 3: you think about it too, is you think about from
Speaker 3: an M and A perspective. There was no M and
Speaker 3: A during twenty twenty and COVID for those couple of months.
Speaker 3: Yet every single bank in the country did one. They
Speaker 3: didn't realize it. They got no assets. An enormous amount
Speaker 3: of deposits were dumped into the industry. They didn't ask
Speaker 3: for it, major growth on a deposit front, interest rates
Speaker 3: at zero, and no lending anywhere. So you think about
Speaker 3: how balloons those balance sheets got. It's not like banks
Speaker 3: woke up overnight and all of a sudden became fantastically
Speaker 3: better at gathering deposits. So those balance sheets looked a
Speaker 3: lot different. And then fast forward, we were a little
Speaker 3: late to the inflation game. You go up five hundred
Speaker 3: basis points in a very short period of time. You
Speaker 3: have Twitter and the social media role here, and all
Speaker 3: of a sudden, everybody got spooked and dollars started running out,
Speaker 3: not like the WAMU days or not once what's a
Speaker 3: wonderful life it was three hours and forty two billion dollars.
Speaker 4: That's what happened.
Speaker 2: Yeah, this is kind of the dark side of the app. Yeah, yeah,
Speaker 2: it's just the flightiness of deposits. You can pull everything
Speaker 2: out with the click of a button.
Speaker 1: Now, I know, like for our listeners, and I've had
Speaker 1: to explain what is it about just for sort of
Speaker 1: like banking asset liability in the industry like one on one,
Speaker 1: probably even pre one on one. Why is it the
Speaker 1: deposits are interest rate hedge?
Speaker 3: Sure so in theory over the years, historically most of
Speaker 3: us all have checking accounts, We've got savings accounts, and predominantly,
Speaker 3: if you think about it, banks make money not because
Speaker 3: of the asset side the lending, it's because they don't
Speaker 3: pay at market rates on the deposit side. Right, checking accounts,
Speaker 3: nobody really cares what you're making on your checking account.
Speaker 3: As long as the app works, you move your money around,
Speaker 3: you're good. I think what what ultimately happened is for
Speaker 3: years and years you'll hear the term beta and it's
Speaker 3: not from an investor perspective. It's in the bank world.
Speaker 3: Everybody likes to try to project every time the FED
Speaker 3: moves how much a bank have to move their deposit
Speaker 3: rates to keep money in and forever it's kind of
Speaker 3: been this thirty to fifty percent, and I've never really
Speaker 3: subscribed to it. And that's a separate topic, but typically
Speaker 3: that's what we've seen historically. But unfortunately, what it doesn't
Speaker 3: measure is the fact that not only is it a
Speaker 3: rate that we have to pay, but dollars can move
Speaker 3: so much faster based on the technology. And I'd argue
Speaker 3: the demographics here's the bigger issue. If you think about
Speaker 3: it from an asset liability perspective, I can't model the
Speaker 3: demographic breakdown well enough. Yet you think about my father's
Speaker 3: generation versus you know, my future grandchildren's generations, and you
Speaker 3: think about how they view a bank sort of the
Speaker 3: way you all were describing it today. There's a loyalty
Speaker 3: trust matrix, and you think about the loyalty. A lot
Speaker 3: of loyalty in my father's generation and very little trust.
Speaker 3: He gets a two thousand dollars check, he is going
Speaker 3: to a branch, he is going to make sure that
Speaker 3: money is in. He gets his lollipop, he says hi,
Speaker 3: and he leaves. Then you think about the generations beneath below.
Speaker 3: There's a ton of trust. They'll move money around on
Speaker 3: they don't even know the name of the bank they're
Speaker 3: banking app. They'll move it so quickly, but there's very
Speaker 3: little loyalty. And there in lies the difference and why
Speaker 3: we're struggling with how to determine how to manage and
Speaker 3: hedge a balance sheet from a deposit perspective.
Speaker 2: Maybe the banking app should figure out a way to
Speaker 2: deliver lollipops.
Speaker 3: That's right.
Speaker 2: Can I ask another step back question, which is you
Speaker 2: know I was a banking correspondent soon after the two
Speaker 2: thousand and eight financial crisis, and I remember the big
Speaker 2: hope of banks back then was interest rates are going
Speaker 2: to rise and will finally be able to make money
Speaker 2: off of lending. What happened to that portion of it?
Speaker 3: That's the best question I've gotten around this topic over
Speaker 3: the last ninety or one hundred days, Tracy, And I'll
Speaker 3: tell you why. For if I had a nickel for
Speaker 3: every bank that told me in January of twenty twenty two,
Speaker 3: so not too long ago, that they couldn't wait for
Speaker 3: rates to rise. We were prepared for rates to rise, Scott.
Speaker 3: We're going to look so good it's coming finally. I
Speaker 3: mean I for honestly, I've been doing this twenty three years.
Speaker 3: I could have taken the first twenty years off. Everybody
Speaker 3: told me rates were going higher, they never moved right.
Speaker 3: It was very low interest rate environment for twenty years.
Speaker 3: Finally we see interest rates hied tracy and it took about,
Speaker 3: I don't know, nine months until everybody called me and
Speaker 3: said we need help pedging against higher rates. And I'm like, well,
Speaker 3: wait a minute. But ultimately, what we didn't realize, right,
Speaker 3: what we didn't facet in is the fact that, yes,
Speaker 3: when the FED hikes interest rates, and it's why you
Speaker 3: saw twenty twenty two. In the first six months, we
Speaker 3: saw great margin expansion for banks, which was phenomenal. The
Speaker 3: asset side was resetting higher, and nobody was paying up
Speaker 3: for deposits because it wasn't based on the FED. It's
Speaker 3: based on supply and demand. And we had so much
Speaker 3: supply of deposits after COVID that it took a while
Speaker 3: for anyone had to have to pay. Then all of
Speaker 3: a sudden, we had to pay. As things started to
Speaker 3: catch up, Treasury rates got a lot higher. But here's
Speaker 3: the bigger problem. Everybody was looking at their balance sheet
Speaker 3: as if it would stay the same in terms of
Speaker 3: product mix, in terms of size, and ultimately what happened
Speaker 3: is everybody said, well, wait a minute, I can move
Speaker 3: money all over the place. Not only two different banks,
Speaker 3: but banks were competing against treasury rates, right, So all
Speaker 3: of a sudden, people moved their money around a lot faster.
Speaker 3: So we always say it's not changes in rates that
Speaker 3: caused it, It was the way and how athletic bank
Speaker 3: balance youse are today versus where they used to be,
Speaker 3: and it moves a lot faster, tracy, and that's where
Speaker 3: people got caught.
Speaker 2: Just a follow up based on that, But how much
Speaker 2: of the concerns that banks tend to have are shaped
Speaker 2: by things in a stress test? So I'm thinking back,
Speaker 2: worst case scenario of the banking stress test for a
Speaker 2: long time was a recession and rates going very very low.
Speaker 2: It didn't really have much as far as I can remember, Like,
Speaker 2: there wasn't that much modeling based on rates going really
Speaker 2: really high. So does that tend to shape bank behavior? Like?
Speaker 2: Is that the scenario that they end up worrying about?
Speaker 3: This was the double whammy? You're right if you think
Speaker 3: about you know, if you pulled one hundred CEOs throughout
Speaker 3: the country and it was two years ago, even four
Speaker 3: years ago, ten years ago, and you say, what's the
Speaker 3: worst scenario, they tell you, well, rates down to zero
Speaker 3: probably means recession. We've got credit price problems, etc. That's
Speaker 3: going to be a really tough environment for us. Where
Speaker 3: I think we didn't focus enough on is really understanding
Speaker 3: the impact that both technologies social media and the demographic
Speaker 3: changes around the deposit front from a liquidity perspective in
Speaker 3: a higher rate environment. This wasn't a we got to
Speaker 3: slow the economy down from because it's booming organically. This was, Hey,
Speaker 3: we're gonna throw way more money into your industry than
Speaker 3: you asked for, and then we're gonna suck it out
Speaker 3: in record pace. And by the way, we're gonna do
Speaker 3: it over a nine month period, and hopefully you're prepared
Speaker 3: to handle that.
Speaker 1: I want to talk more about the demographics and really
Speaker 1: get these sort of like long term structural changes. But
Speaker 1: before we do, I just want to sort of like
Speaker 1: ask one more question about this sort of like post
Speaker 1: SVB environment. Like KRI the Regional bank ETF is actually
Speaker 1: still lower than it was on March thirteenth, like they've
Speaker 1: stopped spiraling. But the valuations you mentioned, I guess like
Speaker 1: deposits have been stable. But can you talk about like
Speaker 1: there has clearly been this huge repricing of the sector
Speaker 1: that has not bounced back since then. I mean it's flat,
Speaker 1: like there's not everything else is really what about this moment,
Speaker 1: either sort of perceptually or business wise, like, really has
Speaker 1: changed how people view the viability the business prospects of
Speaker 1: these banks.
Speaker 3: Right, there's well, as you know, and both M and
Speaker 3: A and invaluation unknown as a problem. Right, And so
Speaker 3: you've got a few unknowns, Joe, You've got you've got
Speaker 3: regulatory issues coming further stress more capital what is it
Speaker 3: going to be? That's obviously whatever it is, we all
Speaker 3: know it's gonna hurt earnings, right, So you've had it correct. Yes,
Speaker 3: it'll trickle down, there'll be some impacts. And then you
Speaker 3: know you also have and I talked to a lot
Speaker 3: of investors to your point, Joe, you know, almost half
Speaker 3: the banks in the country trading below their tangible book value.
Speaker 3: It's almost weird for me to say that. And we
Speaker 3: really haven't seen any credit losses yet. The problem is
Speaker 3: almost every investor I talk to, whether it's unknown around
Speaker 3: what we just talked about, the regulatory environment, or quite
Speaker 3: frankly unknown around interest rates, or the final one, you know,
Speaker 3: is unknown around credit. And I haven't met an investor
Speaker 3: that's excited about the incredit environment which we're headed into.
Speaker 3: And I think the real problem is we're sort of
Speaker 3: stuck in this nobody knows mode. I'd rather us, you know,
Speaker 3: let's take some hits here, Let's have some credit concerns
Speaker 3: and start to deal with them. We're kind of waiting
Speaker 3: and waiting for the hurricane, but it hasn't come, and
Speaker 3: it might not be a major hurricane, it might be small.
Speaker 3: We just don't know, and so from evaluation perspective, it's
Speaker 3: tough for anyone to invest in anything from that perspective.
Speaker 1: And just real quickly the deposits have settled down.
Speaker 3: Correct.
Speaker 2: Okay, So Joe mentioned that KBW Regional Bank Index. Can
Speaker 2: you talk a little bit more about the differentiation that
Speaker 2: we've seen between the big banks, so the JP Morgan's
Speaker 2: of the world, which seem to have been massive beneficiaries
Speaker 2: of these liquidity issues, the regionals and then the really
Speaker 2: small community banks, Because I think a lot of the
Speaker 2: community banks ended up getting lumped up in the regional category.
Speaker 2: But actually they seem to do okay.
Speaker 3: Right, And I think the biggest challenge right now is
Speaker 3: exactly the way you lay it out. If you think
Speaker 3: about it, the largest banks in the country rely a
Speaker 3: lot less on deposit in loan out right. They make
Speaker 3: a spread, but they don't live and die by their
Speaker 3: spread business. The smaller tracy the bank you get to,
Speaker 3: the more they rely on spread business, and that's a
Speaker 3: problem when you've got an inverted yield curve. You've got
Speaker 3: deposit costs continue to elevate. They've stabilized, Joe A to
Speaker 3: your earlier point, They've stabilized from a balance perspective, but
Speaker 3: I don't believe we stabilized yet on how much it
Speaker 3: costs me to keep people here, or the concern around
Speaker 3: how much I'm going to cost to keep people here.
Speaker 3: So you've got margin compression for the smaller institutions who
Speaker 3: have very little fee income. You think of out JP Morgan,
Speaker 3: They've got revenues all over the place in all different
Speaker 3: business lines. You go down to the smallest community banks
Speaker 3: in the country, and they live and die by depositing
Speaker 3: loan out, make the spread, manage that spread, and pay
Speaker 3: for everything they need to pay for. So that's the
Speaker 3: simplistic view, Tracy of the differences as you go down,
Speaker 3: there's obviously some others as well. Scale here is unfortunately
Speaker 3: playing a game, going to play a large role in
Speaker 3: the game. Excuse me as we think about it. I
Speaker 3: sound like an investment banker in that that leads to
Speaker 3: M and A. But it's really true if you think
Speaker 3: about scale in a world that I think across the board,
Speaker 3: bank margins will continue to be lower apples to apples
Speaker 3: in any rate environment because we're probably going to have
Speaker 3: to hold a little more aquidity, probably got to hold
Speaker 3: a little bit more capital, and certainly having the rear
Speaker 3: view mirror of what happened at Silicon Valley. Yet Tracy,
Speaker 3: to your point, there's maybe five banks that look like
Speaker 3: Silicon Valley out of four thousand. Yet the others are
Speaker 3: going to pay for some of that as well, and
Speaker 3: that's hard.
Speaker 4: You know.
Speaker 1: Right around the time of Silicon I think like I
Speaker 1: did a little bit of traveling. Tracy and I were
Speaker 1: in Chicago, for example. Not long after that, I went
Speaker 1: to like a wedding in Boston, and the only reason
Speaker 1: I bring that up is like when you're in a
Speaker 1: new area, I find you just see all these banks
Speaker 1: you've never heard of, these like tiny local banks. Like
Speaker 1: you know, I'm probably making it up, but it's like
Speaker 1: the like you know, the Medford Community Savings Bank outside
Speaker 1: of Boston, and the sort of you know, Third Bank
Speaker 1: of Illinois, and just all these like branches talk to
Speaker 1: us about like essentially sitting aside rate compression.
Speaker 4: And rates go up and down.
Speaker 1: We don't really know what the future like this sort
Speaker 1: of like operating business these days that they're in and
Speaker 1: the sort of challenge they have of like bringing in
Speaker 1: new depositors for a local bank. Again, when I could
Speaker 1: just like go on you know, job dot com.
Speaker 3: You're right, Joe, And and it's one of the things
Speaker 3: I do too. It's just I happen to know all
Speaker 3: those banks as I travel around, but it's the same
Speaker 3: and I'm like, oh, that's what that's located. But as
Speaker 3: you think about their their business, right, yeah, all of
Speaker 3: those smaller banks, most of those smaller banks was started
Speaker 3: in the commun unity folks at the schools, at the churches,
Speaker 3: at the country club started this bank in town, and
Speaker 3: everybody kind of banked in that town, and you think
Speaker 3: about that worked for a long period of time. Back
Speaker 3: to that loyalty trust component, there was a lot of
Speaker 3: loyalty to who you banked with. You fast forward to
Speaker 3: sort of where we are today, and you think about
Speaker 3: the demographic changes. You think about ten, fifteen, twenty years ago,
Speaker 3: Joe a bank balance sheet, the community bank world had
Speaker 3: almost half of its deposits were in CDs. I bring
Speaker 3: that up because if you think about it, that gave
Speaker 3: banks time. You have a one year CD on your
Speaker 3: balance sheet. Rates don't move on those deposits for a year,
Speaker 3: no matter what rates are doing. You fast forward to
Speaker 3: where we are today and you think about two things.
Speaker 3: The average age of a CD holder is a lot
Speaker 3: higher than you would guess at almost any institution in
Speaker 3: the country.
Speaker 1: Clus the youngest person who even owns the CD of
Speaker 1: the United States.
Speaker 3: I'm looking for that individuals. I want to know who
Speaker 3: it is. But you're right, it is really that demographic
Speaker 3: has changed. But that's a really important point because as
Speaker 3: banks are trying to grow deposits, they're out there trying
Speaker 3: to reach in CD world. Yet I do a fair
Speaker 3: amount of interviewing for folks that originally Sandor orneil Nolt,
Speaker 3: Piper Sandler want to come to New York learn about
Speaker 3: community banking and way smarter than I am. And they
Speaker 3: ask me questions I can answer, but I always have
Speaker 3: a question they can't answer. Do you know what a
Speaker 3: CD is? And they've never heard of it, whether it
Speaker 3: was banking or music. And yet then I'll go to
Speaker 3: the next boardroom. I'm in the next bank of the Sey.
Speaker 3: Now we're gonna fill the liquidity hole. We're going to
Speaker 3: go out and run a fifteen month CD special. The
Speaker 3: game has changed, the demographics have changed. People want CD
Speaker 3: rates with money market flexibility and operational flexibility. And that
Speaker 3: is the biggest dynamic we're seeing for the smaller community banks.
Speaker 3: And that's what happened. Back to Tracy's earlier question, the
Speaker 3: deposit world and how much we can hedge with the
Speaker 3: deposits is going away quickly. Without those CDs, we have
Speaker 3: no contractual liabilities on most bank balance sheets anymore.
Speaker 2: On the deposit beta point. I mean, there are some
Speaker 2: banks out there that are offering very competitive rates, at
Speaker 2: least compared to others, and you are the perfect person
Speaker 2: to answer this question, But what are they doing that
Speaker 2: others are not. And you know, I get that scale
Speaker 2: is a factor here. So if you if you're big,
Speaker 2: you can maybe afford to return a little bit more
Speaker 2: to depositors. But maybe for some of the non megabanks,
Speaker 2: is it risk your lending? Right?
Speaker 3: Great question, And most of it comes honestly tracy from
Speaker 3: supply demand. And what I mean by that is if
Speaker 3: you go and did a scan of one of them,
Speaker 3: and it's a very high level metric, but one of
Speaker 3: the metrics I love to look at for banks in
Speaker 3: the countries loan to deposit ratio. And when you start
Speaker 3: seeing that number get closer and closer than ninety percent,
Speaker 3: then up to one hundred percent, you better bet that
Speaker 3: those institutions that's where you want to keep your money,
Speaker 3: because they're going to pay. They're going to pay whatever
Speaker 3: they have to pay to keep money in there, both
Speaker 3: from a liquidity metric a regulatory metric to keep that
Speaker 3: loan to deposit ratio within reason so that they're not
Speaker 3: an outlier, right. And so you're seeing a little bit
Speaker 3: of that, you're seeing a little bit of quite frankly,
Speaker 3: most banks will tell me right now they're willing to
Speaker 3: pay those you see those today, I was in Chicago.
Speaker 3: I was at an airport head of the airport, and
Speaker 3: on my car ride this morning, I saw a CD
Speaker 3: for five thirty five. I thought to myself, the same thing.
Speaker 3: Does that mean a typical bank margins three and a
Speaker 3: half percent? Are they putting on loans at nine percent?
Speaker 3: Most banks aren't or they're you know, so it begs
Speaker 3: the question of you're going to see margin compression. I
Speaker 3: think I've never met a bank that told me they're
Speaker 3: going to be less than assets next year than they
Speaker 3: are this year. I think you're going to meet a
Speaker 3: lot of new banks that are going to be a
Speaker 3: lot smaller than they were a year ago, because all
Speaker 3: of a sudden doesn't make a ton of sense financially.
Speaker 3: But right now we're still stabilizing and willing to pay
Speaker 3: up a little bit. But over time, Tracy, as that
Speaker 3: stabilizes those rates, I expect them to start to come
Speaker 3: down a little bit because I don't see loans catching
Speaker 3: up and making the equivalent yields that you need to.
Speaker 1: Can we talk about sort of non interest costs for
Speaker 1: the bank, and I'm thinking, you know, there's a million
Speaker 1: stories that we've probably run about JP Moore and going
Speaker 1: out and hiring a thousand people who understand artificial intelligence
Speaker 1: right now, you know, it's like and like, I again,
Speaker 1: I imagine that like Cambridge Community Bankcorp. Is not an attractive
Speaker 1: place for an AI expert or with But like you know, like,
Speaker 1: what is that going to mean about the sort of
Speaker 1: like product gap that exists between these megabanks that have
Speaker 1: like huge tech teams and the local.
Speaker 3: Yeah, that that by far keeps I think a lot
Speaker 3: of bank CEOs that we're talking about today he or
Speaker 3: she up at night because the gap is widening. Right,
Speaker 3: The gap continues to widen. And it's not even the technology,
Speaker 3: it's the combination of the technology and your users. Right.
Speaker 3: You think about the average demographic again going back to
Speaker 3: how much more in demand those technology skills and tools
Speaker 3: are for a bank to offer, both for hiring and
Speaker 3: also to gather deposits, gather customers, and so that is
Speaker 3: an enormous cost. That and fraud are two of the
Speaker 3: biggest costs for banks today.
Speaker 1: It's talk about fraud and how that manifest is a
Speaker 1: cost for.
Speaker 3: Those Sure, I mean you think about it, and you know,
Speaker 3: if you've ever gotten a text from your bank saying, hey,
Speaker 3: we just noticed you paid you know somewhere and you're
Speaker 3: not even in that state. We took care of it
Speaker 3: for you, and then they have to go work it
Speaker 3: out and try to go get it back. They're not
Speaker 3: getting every dollar back. That's just a cost of doing
Speaker 3: business in the bank world. You combine that with margin
Speaker 3: compression on your real business, how much you got to
Speaker 3: pay for technology to get talent and the technology in there,
Speaker 3: and it's another big drag on earnings overall at the institution.
Speaker 2: So I remember a lot of these themes from the
Speaker 2: post two thousand and eight banking environment, and there was
Speaker 2: this big question of, well, why would anyone start a bank?
Speaker 2: Because we have higher regulation, we had sluggish economic growth
Speaker 2: at that time. The tech spend was already an issue,
Speaker 2: the idea that while opening up brick and mortar bank
Speaker 2: branches is very expensive, we can't do that anymore. Is
Speaker 2: there a bowl case for starting a bank nowadays? And
Speaker 2: I remember again post two thousand and eight. I think
Speaker 2: there was one bank that opened in like twenty ten,
Speaker 2: and then one new bank, Denovo Bank in twenty thirteen,
Speaker 2: and I went to see it. It was this little
Speaker 2: Amish bank in Lancaster County in Pennsylvania called Bank of Birdenhad,
Speaker 2: and it was honestly the most adorable bank that I've
Speaker 2: ever seen anyway.
Speaker 3: Side note, well, that's one of the big things that
Speaker 3: I like. Just using the word, the word Denovo. We
Speaker 3: don't say it anymore. Right, It's tough tracy from an
Speaker 3: investor perspective to say I'm going to I'm going to
Speaker 3: start a bank, when on earth am I going to
Speaker 3: get my money back?
Speaker 4: Right?
Speaker 3: It's going to take a lot longer than it did ten, well, fifteen,
Speaker 3: twenty years ago. Now I'm getting older. That's part of
Speaker 3: the problem. You're not seeing a lot of the Denovo
Speaker 3: world because, both from a regulatory perspective and just apples
Speaker 3: to apples, earnings for banks on average are going to
Speaker 3: be harder and harder to come by, which again just
Speaker 3: makes the return longer and longer. And folks say, I
Speaker 3: could go invest in something else and probably get my
Speaker 3: money back a lot faster. Because we used to look
Speaker 3: at the stats M and A, this is an interesting component.
Speaker 3: M and A really never changes in terms of how
Speaker 3: many banks sell a year over a twenty twenty five
Speaker 3: year period, but for half of that timeframe, we had
Speaker 3: a lot of denovos. Now we don't, and that's why
Speaker 3: you're seeing the shrinking of the size of the banks
Speaker 3: a lot more. Even though M and A is in
Speaker 3: a little bit of a rain delay right now. Denovos
Speaker 3: are tough to come by, tough to get people excited about.
Speaker 3: Once in a while, though, you'll see some pop up
Speaker 3: and you hear some people talking today around you know, look,
Speaker 3: now I'm not at Silicon Valley. I'm a JP Morgan,
Speaker 3: and I'm just a number, and so there is still
Speaker 3: the relationship side. Is there a way to marry the
Speaker 3: technology and the and the relationship. Sorry interrupt you, Joe.
Speaker 4: No that's great, But no you didn't.
Speaker 1: I was interrupting you, but it's because you sort of
Speaker 1: anticipated my next question. So, like, community banks strike me
Speaker 1: as one of those things like mom and apple pie
Speaker 1: in baseball, which is like everyone loves the idea of
Speaker 1: the community bank, right, and politicians. You know, my understanding
Speaker 1: is that actually in DC, the community banks are like
Speaker 1: pretty well represented, and that politicians like to make sure
Speaker 1: it's like, you know, well, my bank and my constituents banked,
Speaker 1: and Tulsa get the same treatment as the fantasy in
Speaker 1: New York.
Speaker 4: Banks and all that stuff.
Speaker 1: What would be lost in terms of like what is
Speaker 1: different about community banks in terms of both the relationships
Speaker 1: but also like their asset mix and the type of
Speaker 1: business that they do that goes away if they have
Speaker 1: trouble remaining robust business.
Speaker 3: I think we've got a great example of it. And
Speaker 3: it was so many other things going on, Joe, that
Speaker 3: we didn't maybe notice it all the way. I give
Speaker 3: such tremendous credit to the community bank space during COVID
Speaker 3: because if you think about how quickly they they reacted
Speaker 3: on the triple P and were able to get out
Speaker 3: and meet their customers' needs at a very, very challenging time.
Speaker 3: It was a short window of challenge, right, but it
Speaker 3: was a very scary time in terms of the small
Speaker 3: business side of the world be being helped out. And
Speaker 3: the largest bank said, we understand what you want us
Speaker 3: to do, but we remember and how much I got
Speaker 3: in trouble for getting involved in this, so we're gonna
Speaker 3: slow play it a little bit. Whereas the small community banks,
Speaker 3: I'm telling you, I was really proud to know a
Speaker 3: lot of them. I had a friend call me who
Speaker 3: said his father ran a business, a small business. He said, Hey,
Speaker 3: could you get my dad, he banks at XYZ bank?
Speaker 3: Could you actually get him in touch with I called
Speaker 3: the treasure. We made the connection, he got his money,
Speaker 3: and it just felt really good that there was that dynamic.
Speaker 3: So I think there's something there, Joe that I think
Speaker 3: banks do a great job of executing their helping their clients.
Speaker 3: They do a poor job marketing.
Speaker 1: Is there something I mean, I think that's a great example.
Speaker 1: Is there something in the asset side or the loan side,
Speaker 1: whether there are's still like whether it's real estate, certain
Speaker 1: types of real estate transactions, maybe like medium and small
Speaker 1: business type loans.
Speaker 4: Like that's like I want to know, build a little.
Speaker 1: Factory and where actually there's like a clear advantage to
Speaker 1: like the local bank that knows the space, because that's
Speaker 1: like the theoretical idea, they know the community and they
Speaker 1: can do this. But like talk to us about how
Speaker 1: that actually how that plays out.
Speaker 3: Sure it plays out a lot, and I'll tell you
Speaker 3: the asset side is really becoming where banks can try
Speaker 3: to differentiate themselves on service and relationship and knowing the community.
Speaker 3: I know my dad's on a board of a country
Speaker 3: club and he's probably embarrassed I'm even talking about it,
Speaker 3: But he was telling me how the bank that was
Speaker 3: serving the country code I want to do some work
Speaker 3: and wanted to get a loan, but the loan was
Speaker 3: like two or three million dollars, and they think that's
Speaker 3: a lot of money to a large bank. That's almost
Speaker 3: not worth the time, the risk, the headline risk. He said,
Speaker 3: there was two or three small community banks willing, hustling,
Speaker 3: wanting to be helpful, know the market really well. And
Speaker 3: so that's a great example. Again, I just think the
Speaker 3: nimble and athleticness of a community bank versus the largest
Speaker 3: is really one of the advantages that are there that
Speaker 3: they need to play up more. They do a better
Speaker 3: job at that. I think.
Speaker 2: Okay, so smaller banks might have better relationships, might do
Speaker 2: a better job of small business lending or supporting the
Speaker 2: individual community. The big banks have economies of scale that
Speaker 2: make it possible to earn a relatively decent return at
Speaker 2: various times. I'm going to ask the big question, but
Speaker 2: putting it all together, what does the ideal banking system
Speaker 2: in the US actually look like? How should we balance
Speaker 2: the small banks with the bank? Yeah?
Speaker 3: Great, great question, and again, it's a very difficult one
Speaker 3: to answer, you know, spot on, Tracy, But my own gut,
Speaker 3: my own kind of experience. If we're at four thousand
Speaker 3: banks right now, we're probably heading somewhere towards. I was
Speaker 3: talking about some of the last night, maybe a couple
Speaker 3: of hundred banks over the next ten to fifteen years.
Speaker 3: And I think there's room for the largest, and I
Speaker 3: think there's room for the community bank world. And maybe
Speaker 3: I'm being a little light, Yeah.
Speaker 4: We might only have a couple of hundred banks.
Speaker 3: I'm thinking over the next fifteen to twenty years, and
Speaker 3: I think what you're going to see or you're going
Speaker 3: to see great bankers merging together to really start creating
Speaker 3: more of the mid size, smaller regionals that can deliver
Speaker 3: better service and have more economies of scale. I really
Speaker 3: believe that. And I'm probably going to get yelled at
Speaker 3: for saying the number, and maybe it's a bigger number
Speaker 3: than that, Joe, But in my mind, the way I
Speaker 3: think about it, when I started, there was double the
Speaker 3: amount of banks, you know, And so we're heading in
Speaker 3: some form of that direction. Partly because of what Tracy said,
Speaker 3: Denovo's aren't really out there to fill the need. And
Speaker 3: there's a lot of benefits from putting a couple of
Speaker 3: these great banks together so that they can offer a
Speaker 3: wider scale, economies of scale, better technology, better cyber security components.
Speaker 3: So I think you're going to see less banks, but
Speaker 3: I think more of them will be able to battle
Speaker 3: the largest ones if they team up a little bit.
Speaker 1: Oh, there are some companies making a fortune basically offering
Speaker 1: white label apps and fraud prevention services, etc. So that
Speaker 1: these banks don't actually have to have any of that
Speaker 1: expertise in house.
Speaker 3: Yeah, I would tell you when you hear a lot
Speaker 3: in our world, the fintech world. The fintech world has
Speaker 3: been great for the community bank space because there's a
Speaker 3: lot of teaming up right. The fintech world does a
Speaker 3: great job creating an app, creating a mechanism that tracks
Speaker 3: to your point that or loan origination or whatever they can.
Speaker 3: And the banks really opened their eyes about five or
Speaker 3: six years ago and said, we can really team up here.
Speaker 3: We've got great balance sheets. Love to work with the
Speaker 3: FinTechs on combining and finding the right technology again, so
Speaker 3: I can battle the largest companies that we compete against.
Speaker 2: Just going back to the demographics point. Is there anything
Speaker 2: that you're seeing that's interesting on that front in terms
Speaker 2: of banks trying to either make deposits more sticky or
Speaker 2: maybe attract that new sort of younger base of depositors.
Speaker 3: Right, there hasn't been anything that's been completely outside the
Speaker 3: box that I've seen yet, and I'm always kind of
Speaker 3: looking for one little, little anecdote. I had a couple
Speaker 3: of years ago, maybe two years ago, three years ago now,
Speaker 3: I remember speaking with our interns, is about thirty of them,
Speaker 3: and I asked each one individual, I said, why do
Speaker 3: you bank where you bank? And fifty percent of the
Speaker 3: folks in that room, maybe sixty percent said to me, well,
Speaker 3: I bank, were my parents bank. And so that was like, okay,
Speaker 3: the community bank world has a chance here to try
Speaker 3: to capture the beginning. Right, you have the beginning of it.
Speaker 3: Do you know what the other folks were saying, Well,
Speaker 3: my bank offers a free one year membership to Spotify.
Speaker 3: So I googled what spot I don't know anything, right,
Speaker 3: So I google what Spotify is and I realized it's
Speaker 3: the same version, tracy of what we were doing twenty
Speaker 3: thirty years ago. You remember the stories of getting a
Speaker 3: free toaster if you opened up a check account. It's
Speaker 3: trying to change the sort of component that leads you
Speaker 3: to do it. But it sounded very similar to that process.
Speaker 3: So I see some of that working things like that,
Speaker 3: But I also think it's the education side of it.
Speaker 3: It's offering. Your branch now is in a branch the
Speaker 3: way we used to think of it. It's more of
Speaker 3: a community center. It's almost like a Starbucks. Come on in,
Speaker 3: hang out, you know, get to just spend some time here.
Speaker 3: You'll meet other folks that are doing some business, like you.
Speaker 3: All things like that. I'm seeing a little bit and
Speaker 3: that tends to sometimes work as well.
Speaker 1: With Tracy, what's the coffee shop that's like in our building?
Speaker 4: I was just thinking about that one.
Speaker 2: I think it is. It's like a Capital One bank
Speaker 2: branch slash coffee shop.
Speaker 1: Yeah, you need to go in there, and people are
Speaker 1: in there all the time, like drinking coffee and eating
Speaker 1: scones and you know, I guess maybe take out a mortgage.
Speaker 1: It's like right on our blog, we should definitely go
Speaker 1: there soon.
Speaker 2: A field trip to the local bank brand, you know.
Speaker 1: Tracy asked about the demographics of depositors. You told the
Speaker 1: story of your dad on the board of a country club,
Speaker 1: and so I have a certain image of, like what
Speaker 1: the age of the board of a country club is,
Speaker 1: and I have a certain image in my head of
Speaker 1: like the type of people at banks who have relationships
Speaker 1: with the board of a country club. Could you talk
Speaker 1: about the demographics on the employment side of the banks
Speaker 1: and like hiring new talent and the challenges.
Speaker 3: There, sure, no, That's another one that I see a
Speaker 3: lot of. And as you travel around and you know,
Speaker 3: one of the things people will tell you one of
Speaker 3: the drivers of M and A is succession planning. Very
Speaker 3: very difficult to get folks to find the talent, to
Speaker 3: find the individuals that really want to run these community banks.
Speaker 3: So at times when you look at a deal getting done,
Speaker 3: sometimes it's really done because from a succession planning perspective,
Speaker 3: you'll see that more and more so, I think there's
Speaker 3: a real challenge there both from an excitement again, I
Speaker 3: think it goes back to you know, banks do a
Speaker 3: great job on social media in terms of monitoring their employees.
Speaker 3: What I think they do a terrible job of is
Speaker 3: marketing and getting the excitement about how they're different, what
Speaker 3: they're doing to try to attract that younger talent in
Speaker 3: because what used to be is everyone used to go
Speaker 3: to the top five or six banks in the country.
Speaker 3: They great training programs, and then those individuals would leave
Speaker 3: those training programs and go run all the community banks
Speaker 3: in the country. They don't really have those programs anymore,
Speaker 3: and so it's difficult. Yeah, it's difficult to find individuals
Speaker 3: that really want as much as they used to be,
Speaker 3: and so that is a real challenge as you think
Speaker 3: about a growth opponent. Of most boardrooms I'm in, the
Speaker 3: average age is on the higher side for sure, and
Speaker 3: that makes it challenging. If you think about the demographic
Speaker 3: overhaul we're going through, it's not just lending, it's the
Speaker 3: deposit side that we don't. Banks don't underwrite their depositors
Speaker 3: like they underwrite the loans, right, and we've got to
Speaker 3: start doing that with better representation on the board of
Speaker 3: folks that are truly going to baby try to help
Speaker 3: you from a social media perspective, from other ways to
Speaker 3: gather those deposits and meet them new demographic needs.
Speaker 2: So, just going back to March's banking drama, so it
Speaker 2: feels like some of the really extreme deposit moves have
Speaker 2: started to moderate now, and at the same time you
Speaker 2: have the FED coming out with potentially additional capital requirements
Speaker 2: for larger banks. I take the point that you'll probably
Speaker 2: see some compression on net interest margin going forward as
Speaker 2: people have to compete with deposits. But what's the next
Speaker 2: big I guess concern or thing that's keeping up bank
Speaker 2: executives or your.
Speaker 3: Sure I think it's the you know, you kind of
Speaker 3: go from the unknown. Like you said, we're going to
Speaker 3: have higher capital requirements which are going to drag into earnings,
Speaker 3: which is ironic because Silicon Valley's problem wasn't capital. But anyways,
Speaker 3: well why digress, right, But we'll we'll move forward. I
Speaker 3: think then you start thinking about what's keeping them up
Speaker 3: at night is the fact that perception or reality, I've
Speaker 3: got to manage my balance sheet differently from a liquidity perspective,
Speaker 3: and that's also going to cost money. And what I
Speaker 3: mean by that is we used to think about and
Speaker 3: this is a little bit in the weeds Joe and Tracy,
Speaker 3: so I apologize, Hi, it's too much. But one of
Speaker 3: the things we do when we project out an earning
Speaker 3: stream of a bank based on changes and interest rates
Speaker 3: is we have to assume how long those deposits, how
Speaker 3: sticky they are. Right, there's no actual contractual maturity for
Speaker 3: a lot of those. But typically what people would do
Speaker 3: is they go back thirty years and they'd say, on averages,
Speaker 3: a checking account lasts about seven years. So that's great.
Speaker 3: It gives us a lot of protection in that rising
Speaker 3: rate environment. Right in theory. The problem is the examiners
Speaker 3: are going to come in now and say seven years.
Speaker 3: That's historically fine. But I'm not buying into that anymore.
Speaker 3: What I now need to look at is you can
Speaker 3: tell me seven years, but it's also seven years with
Speaker 3: a one day call option that those dollars can leave
Speaker 3: out at any point in time. That puts a lot
Speaker 3: more pressure on the types of lending you do, the
Speaker 3: types of balance sheet you're running, which, ultimately Tracy gets
Speaker 3: to your point, earnings again are going to be under
Speaker 3: pressure from that perspective, and I would argue apples to
Speaker 3: apples that Sunday night. The first thing I said to
Speaker 3: myself when I read the press release about Signature and
Speaker 3: Silicon Valley is I said, maybe this country only wants
Speaker 3: to have five banks, right, you know, That's the first
Speaker 3: thing I said to myself, because apples to apples, Tracey,
Speaker 3: are you gonna put your money? Let's say you're the
Speaker 3: treasure of a corporation that was banking at Silicon Valley
Speaker 3: over that weekend you got bailed out, right, but that
Speaker 3: Monday morning, you weren't going to your board and saying,
Speaker 3: you know what, I'm gonna move our deposits to bank
Speaker 3: XYZ you've never heard of. I'm going to Jamie. Now
Speaker 3: I'm in a JP Morgan and I'm going to bank there.
Speaker 3: And that's to me, why apples to apples. A community
Speaker 3: bank's going to have to pay more for liquidity than
Speaker 3: the largest banks in the country. Not that keeps them
Speaker 3: up at night. And hedging in general, I run our
Speaker 3: derivative business separate of some of the other things I do.
Speaker 3: Our derivative business is skyrocketed because derivatives are used to
Speaker 3: hedge interest rate risk, and we used to not have
Speaker 3: to use them as much because the deposit side of
Speaker 3: the world. Now, with this deposit concern around the optionality
Speaker 3: risk for lack of better terms, derivative use has exploded.
Speaker 3: I'd like to think it's because I'm really good at it.
Speaker 3: It's not. It has nothing to do with me, and
Speaker 3: it has everything to do with the market. And I
Speaker 3: work on a wonderful team. But that's really what's going on.
Speaker 3: From that perspective.
Speaker 1: This was the missing piece because you know, we talked
Speaker 1: to Terry Duffy. Yeah, and he's like, no, you de
Speaker 1: have to like if you wanted to like hear about
Speaker 1: their hedging business. They don't do it through they ce
Speaker 1: and me. They do it through the banks. Yes, and
Speaker 1: you're it sounds like they really were cranking it up.
Speaker 3: One of the things I do is I go to
Speaker 3: boards and I go to management teams. I look at
Speaker 3: the balance you, I look at the interest rate risk position,
Speaker 3: and I say, you have now some exposure here, let's
Speaker 3: show you the derivative transactions. That makes sense.
Speaker 2: Are there particular products that are getting really popular.
Speaker 3: Yeah, I would say there's a few, and most of
Speaker 3: them are are a lot of folks have a lot
Speaker 3: more mortgage book. Their mortgage book is a lot bigger
Speaker 3: than they wanted it. Right back in twenty and twenty one,
Speaker 3: everyone has a mortgage. It's not going anywhere. So what
Speaker 3: a lot of banks are doing is swapping that fixed
Speaker 3: rate asset to a floating rate to reduce their interest
Speaker 3: rate risk from a higher for longer perspective. That's one area.
Speaker 3: The other area is on the liability side. It's the reverse,
Speaker 3: but the same concept. They're paying fixed on interest rate,
Speaker 3: swapping the liability side and locking up their costs on
Speaker 3: short funding for a long period of time. Those are
Speaker 3: very very popular transactions on the derivative front.
Speaker 1: So I just have two questions. One is a short one,
Speaker 1: and you were because you're talking about the flightingness of deposits.
Speaker 1: Someone told me, like, I guess in the old days,
Speaker 1: they're like once people are in a bank, they're more
Speaker 1: likely to get divorced than change banks.
Speaker 4: Is was that true?
Speaker 3: Yes, that's why checking it gaines. We're the golden neck.
Speaker 3: Everything else was secondary. I wanted your checking again.
Speaker 1: And that's why it was still worth to build bank branches,
Speaker 1: because if you just get them in the door, it's
Speaker 1: a lifetime money.
Speaker 4: Okay.
Speaker 1: One last question, and it's sort of the question mark
Speaker 1: to me, like you're like, well, maybe we'll just want
Speaker 1: six banks in this country, but maybe in twenty years
Speaker 1: we'll just be down to two hundred banks.
Speaker 4: Is there the political willingness to.
Speaker 1: Let that happen, because you know, there was concerned when SVB,
Speaker 1: like we can't let Jamie Diamond buy it, right, And
Speaker 1: then First Republic they did tell the JP Morgan. But
Speaker 1: there's a whole lot of anxiety. And again, people have
Speaker 1: politicians have a real affinity. It's kind of like, I mean,
Speaker 1: I think it's like baked into America, right, but like
Speaker 1: we didn't have cross state banks for a long time.
Speaker 1: Like the distribution of banking is like kind of a
Speaker 1: core American thing, for better or worse. So can you
Speaker 1: talk a little bit about just sort of the regulatory
Speaker 1: willingness to allow the consolidation that you anticipate, Will it
Speaker 1: let it happen?
Speaker 3: Yeah, no, great question. And it flip flops. Right one moment,
Speaker 3: I'm reading about another deal that's not going to go through,
Speaker 3: and they'll claim it took too long from a regulatory perspective.
Speaker 3: But then you'll hear Yellen kind of encouraging the fact
Speaker 3: that we're going to see a lot of a lot
Speaker 3: of M and A. And I think you're right though,
Speaker 3: And one of the arguments against my comment about the
Speaker 3: amount of baks in this country is absolutely political from
Speaker 3: You're absolutely right Joe, and it's probably why I will
Speaker 3: I will be wrong on my number, and that's okay.
Speaker 3: I hope I'm wrong, But in my mind, mathematically, the
Speaker 3: way I see it, if we're really trying to compete
Speaker 3: against folks that basically have a free blanket of there
Speaker 3: there's no un insured deposits at the top five, what
Speaker 3: can I do to compete against it? And that's why
Speaker 3: I said what I said in terms of that.
Speaker 1: Scott Hildenbrand, Piper Sandler, thank you so much for coming
Speaker 1: on the odd last.
Speaker 4: There's a great conversation.
Speaker 3: Joe Tracy, Thank you both, and I appreciate everything to do.
Speaker 1: Thank you, Tracy. I thought that was a great conversation.
Speaker 1: And setting aside like the rate hedging and I'm glad
Speaker 1: we finally talking the rate hedging and all of this,
Speaker 1: Like you do you look around and you're like, how
Speaker 1: can they compete?
Speaker 2: Yeah, it seems tough. To Scott's point, how do you
Speaker 2: compete against people who not only have economies of scale
Speaker 2: but also seem to have de facto unlimited deposit insurance?
Speaker 2: And I guess the arc of history is that the
Speaker 2: number of banks in the US has been consolidating, but
Speaker 2: to the beginning of the discussion and the point that
Speaker 2: you made at the end of it. There is also
Speaker 2: this tension where it feels like there is a big
Speaker 2: portion of America that has this idealized version of a
Speaker 2: community bank in its mind and there are actual benefits.
Speaker 2: So I remember there was an FDIC study I guess
Speaker 2: it's super out of date nowadays, but maybe ten years
Speaker 2: ago where they talked about the proportion of small business
Speaker 2: loans on smaller bank balance sheets versus the bigger ones.
Speaker 2: And of course the smaller banks have a lot more
Speaker 2: exposure to smaller businesses. That make sense, But on the
Speaker 2: other hand, how do you compete and make money against
Speaker 2: a JP Morgan that is spending a lot on technology
Speaker 2: and also has these regulatory advantages, although it also has
Speaker 2: some disadvantages in terms of capital, but still.
Speaker 1: That's right, so it does have higher capital costs. Maybe
Speaker 1: you solve the problem by like, yes, you have a
Speaker 1: lot of consolidation, but then also you know the sort
Speaker 1: of like handshaking meme of like old timey community banks
Speaker 1: with modern FinTechs that lets you have the sort of
Speaker 1: best of both worlds where they know the local country
Speaker 1: club board, but they can also have like AI enabled
Speaker 1: fraud detection.
Speaker 2: That would truly be the ideal. I'm gonna instinctually say
Speaker 2: it's probably more difficult to do than to just talk
Speaker 2: about it. But Joe, we need to take a field
Speaker 2: trip to not to the local bank branch that's below
Speaker 2: our offices. We need to go to Lancaster, Pennsylvania, check
Speaker 2: in with Bank of Bird and Hands.
Speaker 4: I'd love to see what they're doing.
Speaker 2: We should do it. Yeah, let's go.
Speaker 4: All right?
Speaker 2: Shall we leave it there?
Speaker 4: Let's leave it there.
Speaker 2: This has been another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 2: Tracy Alloway.
Speaker 1: And I'm Joe Wisenthal. You can follow me on Twitter
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