What’s Going on with the Banking Industry?, with Christopher Marinac, Director of Research, Janney Montgomery Scott

Intro: [00:00:04] Live from the Business RadioX Studio inside Renasant Bank, the bank that specializes in understanding you, it’s time for North Fulton Business Radio.

John Ray: [00:00:19] And hello again, everyone. Welcome to another edition of North Fulton Business Radio. I’m John Ray. And, folks, we’ve got a special edition today of North Fulton Business Radio. Given what’s going on in the banking industry, I reached out to an old friend of mine, Christopher Marinac. Chris is the Director of Research at Janney Montgomery Scott. Chris has been around for almost three decades covering banks and financial institutions, and he’s pretty much seen it all. So, I can’t think of a better source and a better authority to come in and tell us what’s going on in the banking industry. Chris, welcome.

Christopher Marinac: [00:00:59] Thanks, John. I’m glad to get connected with you today. And it’s fun to talk about all this mess and try to hopefully enlighten folks on trying to hang on and kind of see things for what they are.

John Ray: [00:01:12] Yeah. Well, let’s get right to it. So, seemingly the failure of Silicon Valley Bank started all this mess that we seem to be in. So, talk about what led up to that and what you see as the causes of that.

Christopher Marinac: [00:01:33] So, Silicon Valley Bank had been a special purpose bank for really 30 years in the business of lending and taking deposits with the venture capital community and, really, startup community in Silicon Valley. And over the last two decades, that spread to a practice in Boston, New York, the Southeast, particularly in the Raleigh-Durham Triangle Market, a little bit in Atlanta, but really kind of chasing where the venture capital entrepreneur space startup business is around the country, led by Silicon Valley.

Christopher Marinac: [00:02:06] And they built themselves a very big company. They were primarily a deposit taker of the excess funds and, really, the cash funds that venture capital firms have, equity firms have that are lending to startups. Startups are in business. They may not be making money, but they do have a cash account and they need a bank to work with them. So, this was their special purpose of being.

Christopher Marinac: [00:02:30] The bank did well for a while. And over the years they really had too many deposits and not enough loans, which is not a problem per se. It’s kind of the business model that they were running. But what they were attempting to do is make investments into treasuries the past couple of years with all these excess deposits. And they kind of, to some extent, went further out the yield curve than they necessarily should have and it caught them a little bit in trouble as you talk about mark to market accounting, which was a problem in the last financial crisis for credit reasons. Now, we’re having this for deposit and liquidity reasons.

Christopher Marinac: [00:03:07] So, you know, they have a couple interesting bells and whistles in their business. They bought a company. You remember from the past the Boston Private? That was not their best transaction, but they were trying to support their investment bank that also brought in the capability to manage wealth for their investment banking clients. And so, that was why Boston Private on the cheap in 2021 made sense strategically. That really wasn’t any issue with this. It was just a sidebar that you would know and just part of their growth.

Christopher Marinac: [00:03:37] They primarily had this surge of deposits in 2020, ’21, and early ’22 kind of, not only commensurate, but really twice as fast as the rest of the system. So, by way of background, the deposits in the country grew about 40 percent by the FDIC numbers because of the stimulus that went on in 2020. We had the pandemic. The Fed cut interest rates dramatically. They flooded the system with deposits. That was sort of the answer in addition to PPP loans to try to solve the problem of 2020 and the shutdown.

Christopher Marinac: [00:04:11] So, the deposit system in America was flush with cash, and every bank in the country went up in their DDA or Demand Deposit Accounts, those are zero cost deposits that banks hold. And what you had is that even greater growth. So, if the industry was growing at 40 percent for all banks, Silicon Valley grew anywhere from 80 to 90 to 100 percent, pick a number.

Christopher Marinac: [00:04:35] We’ll call it 100 for simplicity. They just grew at, at least twice, if not two-and-a-half times the industry. Some of that was because of venture capital. Venture capital did really well. You know, not only was the whole cryptocurrency market flying in ’20 and ’21, but you just had venture capital and all the IPOs and the cash that’s associated with that really take off in that era. So, that’s how they had all this excess funding.

Christopher Marinac: [00:05:01] To a layperson, you would think that they were doing an awesome job because they were not taking much credit risk. And generally that’s true. If you read their SEC filings or 10-K filed three weeks ago, you would think that, “Hey, this is a relatively clean bank. It doesn’t have many problem loans or past dues.” And now, in today’s world, we have banks disclosing their classified and criticized loans, which are kind of, you know, rated loans internally that might be a future problem. And even when you look at that bucket of credit risk, it was very low.

Christopher Marinac: [00:05:34] And I think the company was positioned fine on credit. The other side of the balance sheet was really set up to have a bunch of deposits that were structured primarily as DDAs, which, generally speaking, sounds like a great idea, except they were big honkin’ deposits where, in fact, the – sorry for my background noise.

John Ray: [00:05:56] No worries.

Christopher Marinac: [00:05:57] What happens in the DDA world is that, for these type of customers, they were big depositors. So, the statistic that I’ve kind of leaned on this week, which is a simple way of thinking about it, is you can take the FDIC disclosures that every single bank makes no matter how big or how small, and look at the number of accounts and the number of deposits. When you do that, it’s $1.2 million deposits per account at Silicon Valley.

Christopher Marinac: [00:06:26] So, Silicon Valley was 1.2 million. The number at Truist, just to give an example, here in the southeast is about 40,000 or 39 or it’s a very low number. Very granular deposit base at Truist, a retail bank. Sure, Truist does plenty of large commercial banking, but they also have a big commercial network from the old SunTrust, the old BB&T, and that absolutely increases the number of accounts and decreases the deposits per account statistic.

Christopher Marinac: [00:06:56] When you look at other commercial banks, Signature Bank, that also failed, they had $500,000 per account. So, it was a very commercial oriented account that had big deposits. And back to Silicon Valley, that 1.2 million really represented a lot of big firms who, when they start to pull their money, it hurt quickly and fast.

Christopher Marinac: [00:07:19] The old fashioned run on the bank that occurred last Thursday – which we can get into why that happened – it snowballed so fast that the company couldn’t react to it. And it was quickly apparent that they were going to be insolvent. I think the number that the California regulator stated the next day was $42 billion came out on Thursday, the 9th of March. That’s 24 percent of their deposit book.

Christopher Marinac: [00:07:44] So, if we kind of pause at that 24 percent that ran out that one day, this is why that’s relevant. Banks are a leveraged vehicle. They’re leveraged and permitted to be leveraged by the regulators, the FDIC, the Federal Reserve, our state regulators that we have, whether it’s here in Georgia or anywhere in the country. So, you have a dollar of capital typically into $12 of assets. That’s a typical bank set up, levered 12 to 1.

Christopher Marinac: [00:08:12] In the old days, we were levered 20 to 1. In the Bear Stearns days, they were levered 30 to 1. We don’t have that crazy leverage today, but we do have leverage. It’s not 1 to 1. You know, the whole fractional banking system is driven by having this leverage permitted and trying to done in a safe and sound manner. But we did get a ride because you only had so many dollars of capital backing those deposits that left. So, proximately $180 or $190 billion of which $42 million evaporates very quickly. The bank is upside down.

Christopher Marinac: [00:08:47] And to further complicate the matter, the company had 56 percent of its assets in securities. And that was because they had all these excess deposits and they didn’t have many loans, so to offset that, they bought securities.

Christopher Marinac: [00:09:03] And historically, John, banks will take a dollar of deposits and they’ll make some portion of loans, some portion of securities for liquidity purposes, and then cash. And the idea is that you have cash that you can access immediately, securities that have a portion that you can sell quickly, and then another portion that’s kind of more of an investment. And you try to do that within reason as you think through interest rates.

Christopher Marinac: [00:09:29] Nobody’s trying to make a direct bet on interest rates, but you are implied betting on rates as a bank because you’re working off the spread. You’re taking deposits at one level and trying to make loans and make investments at a higher level and make that spread.

Christopher Marinac: [00:09:42] So, what happened with Silicon Valley is they put a bunch of their securities into government bonds, which was perfectly fine from a credit perspective. But just as a reminder for everybody, you have interest rate risk and you have credit risk. So, the credit risk box was checked as doing a really pretty good job, and actually way better than average, in my opinion.

Christopher Marinac: [00:10:05] They did a horrible job on interest rate risk. Because what they basically did is they bought a lot of securities, even though it was government paper and mortgages. They bought things with five and six year durations. And then, some of those were mortgages. And as mortgage rates changed during a rate cycle, like we had last year, what happens is the duration of that extends. So, you have a mortgage pool that you thought was five years, poof, it became seven-and-a-half because interest rates changed.

Christopher Marinac: [00:10:34] And that’s just simple math, because you thought that you would have mortgages stick with you for five years at one rate environment. When rates went up as much as they did, you’re going to hold those mortgages for seven-and-a-half years. It’s not that complicated, but the value of the bond changes a lot. So, they were underwater on their bonds.

Christopher Marinac: [00:10:54] And, effectively, the way that the accounting works, which goes back to the great financial crisis, is, we don’t mark everything to market. We mark some things to market. Not everything. And in the banking world, the regulators sign off on all of this. So, the rules in the banking industry for years and years have been, you have a portfolio of securities that are marked available for sale. Those get treated every 90 days at what the market value is, up or down, in that quarter, at the end of March, end of June, et cetera. And if you have loans held to maturity, those do not get marked. They are not counted against your capital, your earnings, et cetera.

Christopher Marinac: [00:11:32] So, in 2022, most banks had the majority of their securities in available for sale. As it became obvious that rates were going through a very big tightening cycle, because the Fed was very public about it and doing interviews and constant press conferences every time, you knew that they were going to go way above just 50 or 100 basis points. It was going to go a lot. And it has. We went from zero to, you know, 450 or 460 now, and probably going to head to five plus. We’ll see. And we can talk about that, too.

Christopher Marinac: [00:12:05] But, effectively, what you had happen is that the interest or the the value of the bonds changed a lot and it hurt them. And the way that the accounting was, you didn’t have to count that loss. So, the way to go back and think this through is that the regulators knew that there was a big securities book here. They knew that there was a change in interest rates. Values have changed. You know, of the 56 percent of assets at Silicon Valley that were in securities, 44 or 80 percent of their exposure was in held to maturity. They moved everything over to this accounting bucket that did not have to get marked for market.

Christopher Marinac: [00:12:45] Now, it’s okay that that’s the case as long as you understand how much you’re in the hole. And the irony of this is it’s not as if Silicon Valley had lost 50 percent of the value. They lost less than 20. It was just leveraged. It was a lot. And when you had a need for deposits, they could not move fast enough. Even though they did have access to borrowings with the home loan banks, even though they did have some cash, it wasn’t enough.

Christopher Marinac: [00:13:13] It was one of those things where they were a special purpose bank with these big average deposits that are 1.2 million. They didn’t think through the what ifs. And that’s the immediate lesson learned. I think that the scare is the contagion that comes from this. It’s the Signature Bank failing. It’s the memories of the global financial crisis that we lived through in ’08 and ’09 and the mania that surfaced there.

Christopher Marinac: [00:13:40] A lot of which are not really comparable other than the human reaction of, “Oh, my god, my bank’s in trouble. I better pull my funds. I better sell my stock. I don’t know what’s going on. Sell, sell, sell.” And that definitely played out Thursday, Friday, Monday, Tuesday. As we sit here today, we’re still struggling.

Christopher Marinac: [00:14:00] And there’s now European issues that have been around for a decade and are still not dealt with. That’s Credit Suisse. I’m sure Deutsche Bank will come back next. So, you know, for our compliance disclosures, we don’t cover Credit First or Credit Suisse or Deutsche Bank, but they are bellwethers in the industry.

Christopher Marinac: [00:14:20] And as an analyst, you have to pay attention to what they’re doing and saying. And, obviously, there’s fears of those companies struggling and/or needing some type of rescue from the foreign central banks. And we’ll see how that plays out. I’m sure where there’s smoke, there’s fire. That typically is the case. But there’s a lot of misinformation out, too, and we should dig into that. So, I’ll pause there.

John Ray: [00:14:41] Yeah. And that’s one reason why we’re doing this interview, right? So, you can clear all this up for us. And I want to make sure that I sum this up here in terms of what you said. So, this is not an issue with Technology Holdings or anything like that. I mean, I think laypeople see that the big tech stocks have gotten killed over the last 12 months or whatever. And they see all the layoffs and maybe they connect all that. That’s not it.

John Ray: [00:15:14] The issue is simply, it sounds like something of a replay of the SNL crisis back in the ’80s that was really supercharged by this high average deposits. Because you didn’t even have that back in the SNL crisis but you’ve got that here. That’s what it sounds like, a big, big interest rate or duration mismatch.

Christopher Marinac: [00:15:39] Yeah. Exactly.

John Ray: [00:15:41] And then, it sounds like the other thing, too, here, Chris, is the 1.2 million may be a bit understated because if you’ve got all these companies that have deposits at Silicon Valley that have a common venture fund investor that is saying to them you need to get out of this bank, it makes the problem even worse. Right?

Christopher Marinac: [00:16:07] Of course. Absolutely. No question. No question. And I don’t know if we’ll ever know why that happened. To me, it seemed like they were getting stabbed in the back along the same time. Last week was so strange because the company had done investor meetings with several firms, including mine.

Christopher Marinac: [00:16:28] In the month of February, we had a regulator speak at our conference who was very helpful explaining kind of what was happening today from the FDIC’s perspective. That was the first week of February. And, effectively, what was said then and what happened a month or five weeks later was totally different. And that’s the frustrating part. But, unfortunately, that’s what happens sometimes. And, you know, we all have to have our eyes wide open is absolutely a takeaway.

Christopher Marinac: [00:16:57] Silicon Valley Bank said that they didn’t have to sell securities. They had plenty of liquidity. They were going to write it out because, after all, we have treasury bonds and government agency bonds that are money good. We are going to get those back at par. There’s no reason to be concerned about that. They just have a lot of them.

Christopher Marinac: [00:17:15] So, the challenge, I think, is it’s always a concentration issue and a growth rate issue. The deposits grew very quickly, as I mentioned earlier, and then they were concentrated. That’s a lesson learned. And not to get too far ahead of you, John, but I mean, one of the things that I think will happen is all these companies will have a much better information flow about their deposit concentration.

Christopher Marinac: [00:17:38] So, if we take a look at good companies in our backyard, Ameris, United Community, pick any other household, community bank and midsize bank names, they’re going to put a whole new presentation together about what their liquidity looks like in greater detail. But more importantly, what’s our deposits?

Christopher Marinac: [00:17:55] You know, the concept of loans to one borrower has been around in banking as long as I’ve been here 30 plus years. But the deposits to one depositor, no one’s ever heard of that before. And that is going to become a new part of the banking stats that we have to look at. And it’s not complicated. It’s actually pretty simple. How many big depositors do you have?

Christopher Marinac: [00:18:17] And, you know, it’s amazing to me that that granularity wasn’t explored by the regulators, who I do think have blood on their hands on this. I don’t really understand why that was such a foreign concept. We’ve done a lot of work on liquidity and feel really good about liquidity in terms of access in the system. The problem that I think we’ve all learned in real time is you can’t access it fast enough. The Home Loan Bank can give you liquidity relatively quick, but not necessarily in hours.

Christopher Marinac: [00:18:49] You know, my phone is here, being able to use your phone and move money, whether it’s through an app or just contacting your banker, it’s pretty easy to do. I was explaining to someone today, I did a wire a few months ago and I was like, “Wow. That was actually easy.” It was nice because I didn’t want to spend my Friday afternoon dealing with that. And I could do it through emails and a phone call and a couple verifications to make everybody happy from compliance, which was fine. But it really was easy to wire a meaningful sum of money from one account to the other. That’s all I was trying to do.

Christopher Marinac: [00:19:25] And I realized thinking that through, I’m like, “Wow. You could have done that Thursday morning if you were on top of it.” And all those accounts typically had a private banker or a personal contact, and just pick up a scenario, “Hello, Michelle. This is Chris. I’d like to wire $2 million from this to this.” And they do a two way authentication. And generally speaking, that’s probably happened ten times of that account because it’s a normal thing. No problem.

Christopher Marinac: [00:19:53] They just had hundreds of those requests. And as the day went on, the system broke mysteriously. So, some people were not able to get their wires out because the technology broke down that day, which I’m sure was not a coincidence.

John Ray: [00:20:07] Yeah. I’m shocked to hear that.

Christopher Marinac: [00:20:11] I know. I know.

John Ray: [00:20:14] Well, I want to get to the regulators in just a second and dive into that a little bit deeper. But let’s talk about that dark place on Wall Street that people don’t get to until they get to it. And they haven’t gotten to it yet on this one, which is the shorts and those that were short the stock. I know this comes as a shock to people, but some of those news reports you read are planted by those folks because they’re talking their book. That’s the industry term for it. So, talk about the role of the shorts in this failure. And while you’re at it, the Signature Bank failure, too.

Christopher Marinac: [00:21:00] Sure. So, if we go back – and I’m glad you’re asking this because a couple pieces of the story I skipped over are important, which is that, on Wednesday, the 8th, after 4:00 p.m. Eastern, Silicon Valley issued a press release where they said, We are going to raise capital. We are going to restructure our securities portfolio. And these are the terms and this is how it’s going to affect our earnings, et cetera, et cetera.

Christopher Marinac: [00:21:23] Well, investors called BS on that real quick, and what they effectively said was, We met with you in the last three weeks. You told us you weren’t going to do this and now you’re doing this. What did we miss? Did you lie to us? Did you change your mind? Was the heavy hand from Washington telling you to do this? And, of course, I don’t think people got answers. And so, the easiest decision was to sell the stock and say we’re not participating in this preferred and capital common equity race. We don’t care what private equity firm is backing you in the press release. We’re gone.

Christopher Marinac: [00:21:57] And so, you had people selling the stock Thursday night in after market trading, which isn’t always the most liquid market, but it spilled over into a lot of sell orders in the street on Thursday morning. And then, the race was on. The capital race wasn’t happening at any reasonable price. It was going to be materially lower. And then, it was clear that they couldn’t get it done at all. And then, meanwhile, the depositors were running. And that’s literally the implosion of the company.

Christopher Marinac: [00:22:25] So, I’ve never seen it happen that fast. But just like wrecking your car into a concrete wall, it absolutely can happen. I mean, it is a vehicle and you can drive it and do bad things. A bank is leveraged and you can do bad things with it. Even though credit wasn’t the big problem here, it was liquidity and sort of how they were set up.

Christopher Marinac: [00:22:48] And, ironically, we saw the same thing at the Silvergate Bank – again, not covered by Janney – it’s now in liquidation mode. But Silvergate was set up with securities after a parabolic jump in deposits the prior two years. And I didn’t understand that, primarily, because, to me, it would have been easier to park those deposits at the Fed. So, you have the deposits on one side of the balance sheet. On the other side, you either put them in cash or securities. And the best way for cash is to put it at the Fed with Fed funds.

Christopher Marinac: [00:23:21] And ironically, you would have been paid zero for the first couple months of ’22, but then you would have got 25 basis points, then another 50, and then another. And then, all of a sudden you would have been at 4 percent. You would have had a nice yield. And you don’t have to mark the Fed to market. So, you wouldn’t have had that mark to market issue. And if you had a liquidity run, you could call the Fed and get the money instantly.

Christopher Marinac: [00:23:42] It would have unwound that bank way better than it did. And to be honest with you, I haven’t seen banks do that in general. Banks were holding more money at the Fed during the pandemic, I think somewhat as a precaution, because the pandemic was so unusual. We hadn’t had one since 1918. And then, from a standpoint of crypto, I think in Signature Bank, to their credit, did this for a long time. They had money at the Fed as the deposits ballooned. So, as the crypto moneys ballooned, they got more deposits at the Fed. That made sense to me.

Christopher Marinac: [00:24:19] Signature didn’t have the same security issue. They had the fraud problem, and we’ll get into that in a second. But if we stick on Silicon Valley for a minute, the issue to me is really that there was a challenge for them to get the money out and then they bought bonds that probably should have been one and two year durations instead of buying things that were five year, including mortgages that extended. It was just bad decision making.

Christopher Marinac: [00:24:48] And, again, there’s nothing wrong with owning mid-range maturities. It’s just the degree that they did it, particularly given that they have all this extra cash and the setup that they have depositors who have big chunky accounts. And, again, the oversight on the company, I just don’t understand why that wasn’t looked at the way it was.

John Ray: [00:25:11] Folks, we’re here chatting with Chris Marinac. Chris is Director of Research at Janney Montgomery Scott. Been around quite a while, almost three decades looking at banks. And he’s helping us kind of sift through all this mess. You said it earlier that blood is on the regulator’s hands, so let’s talk about why that is in your view.

Christopher Marinac: [00:25:37] So, I feel that the regulators, while they are the referee – if you look at any sports match, the referee can sometimes guide you to what you have to do. Think about the NFL. You know, you have to have both feet in the bounds. You have to kick the field goal through the uprights. There’s certain behaviors that you have to do. If we don’t want you spiking the football or doing a dance or hugging the goalpost, we’re going to tell you because we’re going to give you a penalty and we may send you a fine. And all that stuff that goes on in sports.

Christopher Marinac: [00:26:06] I don’t know why the regulators didn’t really pivot with, “Okay. We have a unique environment. The Fed had to flood the system. We want to be careful and cautious with how you manage deposits through this environment because none of us know how quickly they’re going to leave. A lot of people thought that the deposits were going to exit the system quickly after COVID started to go in the rearview mirror last year. And it was very much a measured decline.

Christopher Marinac: [00:26:30] Deposits were only down about 4 or 5 percent as we entered March. And I thought that was actually a win. You grew 40 percent, you only lost five, that’s pretty good. It was definitely going in the system. The Fed wanted the liquidity to get out and eventually get lent to try to spur economic growth. It happened that way in 2008 and ’09 where deposits surged and then those deposits were put back into the system. And you really didn’t see deposits leave. They kind of stimulated growth. It took until 2011 and ’12 to really start getting things going after the crisis but it did stick around.

Christopher Marinac: [00:27:10] And so, I thought that would kind of be what happens. And I’m not sure that we have finished that story yet because I’m not sure deposits have gone anywhere other than just shift houses, and checking accounts, and names of bank branches not necessarily leaving the system. I don’t think money went under mattresses the past five or six days. I think it went to Bank of America. And I think it just unfortunately went to these big banks.

Christopher Marinac: [00:27:35] I mean, the hedge fund trade the last several days has been, move the money from regional banks and midsized smaller banks to the too big to fail banks. And that’s a goofy phrase that, again, serves their purpose because they’re owning those too big to fail banks. They own Bank of America, JP Morgan, Citi, Wells Fargo. They’re trying to kind of goose their own pocketbook. And that was loud and clear over the weekend, “Oh, these banks, we got multiple failures. It’s really bad.” And you know why, because they own stock in those big companies. That’s the unfortunate side.

Christopher Marinac: [00:28:11] I mean, if you’re on television, you’re supposed to disclose this is what I own, this is what I do. And I have to do that with the times I’ve done appearances. I don’t know what happens with these other folks who are constantly on T.V. Well, we’ll keep the names out of it, but you know who they are. And it’s frustrating. It’s unethical. But it’s what happens. And like I said at the beginning, we have to deal with where we are and what we see in front of us and not kid ourselves about that as a result.

John Ray: [00:28:43] Yeah. And that really gets around to just the main street business owner that sees all these headlines, sees this turmoil, sees “industry expert” that’s talking about this bank is going to fail or that sector is bad, what have you. And they’re alarmed. I mean, they’re alarmed about is their loan going to get called because of a bank’s liquidity problem? Are their deposits going to disappear? What counsel would you give the main street business owner?

Christopher Marinac: [00:29:20] Great question. So, first off, I think you want to understand the deposit account insurance rules. So, it’s 250,000 per account. So, if you had $1 million, you can have four accounts to spread around that risk. I think what may be happening – separate from your question, but just so I don’t forget to mention it – you’re going to see that more businesses have two and three deposit accounts. They probably won’t have ten because that’s a complete pain in the neck, but they probably will have two or three. They’re not just going to have one bank account.

Christopher Marinac: [00:29:51] And that’s not a problem per se. That actually could be a good thing. Because I don’t think Bank of America gets all that business. I mean, Bank of America – no disrespect to them – they’re not easy to work with. And it was not simple to deal with those big banks during the PPP saga of 2020 and ’21. And I think that it was very clumsy to deal with those big companies. If they knew you, great. But chances are they didn’t really know you.

Christopher Marinac: [00:30:17] And that’s why community banks exist. I think the community banks actually set up way better than folks understand because their deposits tend to be more small business oriented. They’re lower deposits per account. They have granularity. And, honestly, they’ll probably even have more granularity as a result of this.

Christopher Marinac: [00:30:36] The other thing that I think that businesses can do is, to some extent, understand how you move your money and how you can shift it around. Are you familiar with sending wires and what you can and can’t do? There’s permissions that you need to move money between banks. If you want to move money from Truist to Fifth Third, you can do it, but you have to have stuff pre-approved and set up. And so, you really should have that mapped out. And sometimes it’s just buttons on your app. It’s authority in making sure you have that clarity. But it’s worth the time to make sure you understand how that works.

Christopher Marinac: [00:31:13] I think having backup lines of credit are always useful for times like this that you can draw on. We think that sometimes this mania causes folks to draw their lines of credit, even if it’s just temporary. I think when the numbers come out for this quarter, we’ll see some of that in the numbers. I’m not sure it’ll be dramatic, but it will be incremental. But that’s a business using their line of credit to just have extra cash.

Christopher Marinac: [00:31:38] I mean, we saw that happen in March of 2020 when folks didn’t know what was going on with the pandemic and all the constant conferences that were happening with the health community and people just drew down funds just in case. Some of that’s probably happening.

Christopher Marinac: [00:31:55] But I think having an awareness of your bank and how healthy they are is always good. I think banks are going to continue to talk about that. I feel like this was a special purpose issue that Silicon Valley started. It created a contagion.

Christopher Marinac: [00:32:08] We didn’t talk about Signature, John, but that was one of the first banks really dealing in crypto. There were only three banks doing cryptocurrencies in a major way, the Bank of Philadelphia, Signature Bank, and then Silvergate that technically failed. I mean, they didn’t fail in the sense that Silicon Valley did, but they’re voluntarily changing or becoming a liquidating vehicle to return all the deposits. That was the best exit for them to try to save face.

Christopher Marinac: [00:32:38] But all of those banks, those three banks, really were kind of tied into taking deposits very quickly, trying to offer bank services in the crypto community. But at the end of the day, they invested, I think, kind of a little bit haphazardly with their securities book, particularly in the case of Silvergate that I thought should have had money at the Fed. That would have been an easier play.

John Ray: [00:33:04] So, I guess by definition, there’s just not a lot of special purpose banks around in the grand scheme of things. What you’re describing here is something that is not what is in the headlines, which is this is a corner of the banking industry that’s having particular issues that do not affect the rest of the industry.

Christopher Marinac: [00:33:29] That’s correct. Exactly. And I think a lot of the hullabaloo that we’ve seen on television and in print about moving to big banks, I don’t really buy that. It could be a short term phenomenon that for the next month or quarter that there is a surge of deposits at Bank of America.

Christopher Marinac: [00:33:47] But here’s the interesting thing, the analysis that we did that we’ve been talking about since last week, on Thursday and Friday, is, when you look at the other banks in the country who also have big securities portfolios, who have big held to maturity portfolios that aren’t marked to market, the next biggest violator is a small bank called Bank of America. Bank of America is the next biggest holder of just a big held of maturity securities. Now, they’ve got more capital than Silicon Valley. They have more liquidity, but they still have the same issue.

Christopher Marinac: [00:34:21] And so, that’s what’s so ironic of people on national television saying you have to go to too big to fail bank. Well, the next one out there has a problem, too. And, again, it’s the same deal, extra deposits, bought government securities, sitting on them and waiting for this to play itself out because those bonds will mature over time. So, it’s just a stink sandwich. And it has definitely hurt the perception of the banking industry. And I think it was unnecessary. But, nonetheless, we’re here. We have to deal with it.

Christopher Marinac: [00:34:54] And I think the best thing for banks to do is really clarify this is who we are, this is what we do. And I think you’re going to see a lot of that in the coming days and weeks (A) to try to get through this deposit air pocket on the worry that is out there, but also (B) to try to set the stage with investors that, “Hey. We’re still in business and running.”

Christopher Marinac: [00:35:15] I think credit will clearly become more constricted as a result of this and it will become most likely a recession before too long. We just have to work through that. I don’t think it has to be that deep. We just have to kind of work through the challenges. And I think to some extent, this is a recession caused by perception because the real world is still out there doing things. It still feels very busy out there. It’s just will probably not be as much loan growth for these banks as a result.

Christopher Marinac: [00:35:45] But time will tell. I’m not that bearish. I just think we have to work through the perception issues here the next couple of weeks. To me, everyday that goes by without another bank failure is a win. I feel like that can happen. The European mess that’s being in the headlines today, that’s to some extent years and years of sweeping under the carpet. A problem that wasn’t dealt with ten years ago, so it’s back. And that’s where the Deutsche Banks and the Credit Suisse have to be somehow dealt with.

Christopher Marinac: [00:36:15] And whether that’s an official rescue or some other lifeline, we’ll see. But that’s the least of our worries at the moment, I think. But it definitely weighs on markets in a short term nature from an equity and bond perspective.

John Ray: [00:36:28] And just so people know, I mean, the average layperson knows, those banks are the European equivalents of Bank of America and Chase in terms of too big to fail. They’re not going to let those banks simply fail.

Christopher Marinac: [00:36:45] That’s right. Exactly. Exactly.

John Ray: [00:36:49] So, talk about what bank stock owners should do right now.

Christopher Marinac: [00:36:56] So, I think bank stock owners should sit tight. I think if you have a chance to add to positions in community banks, I think it’s an excellent time. I view that the industry, because of this air pocket, banana peel, whatever the right phrase is, that you will most likely see banks having paid up more for deposits to keep people happy these last couple of weeks. That will be a little bit of an earnings drag, but not dramatic, but it’ll be a little bit of earnings drag. I think you’ll see less growth. But we were kind of thinking things were going to slow anyways. And to some extent you’re going to see a little bit more credit reserve building, which, again, there’s nothing wrong with that.

Christopher Marinac: [00:37:35] So, I see it as a modest or moderate change to earnings. I don’t feel it’s dramatic. It could be dramatic in a one off company where you really had to defend your deposits in a major way. There’s a couple next door neighbors of Silicon Valley that really have been fighting since Thursday. And so, that could get expensive for them. But I still think that’s a short, intermediate term thing. I don’t think that’s catastrophic for them. But companies are going to have to rethink how they manage that liquidity.

Christopher Marinac: [00:38:03] But your question is, should you have confidence in the community banks? I absolutely do. And I feel like the tenants of community banks as being small business supporters, if anything, this time kind of tests that mettle. Despite everything on T.V., I think a lot of people called their banker and made sure they were doing okay, checked in with what they needed to do, and went about their business.

Christopher Marinac: [00:38:25] And if they decided to add a second account or a third account just as a safety measure, hey, that’s okay. You know, all of us have done things since the pandemic just to be careful. You know, it could be silly things like keeping temperature gauges and extra stuff in the closet. Or it could be like, “Hey, I want to fundamentally be prepared better if something like this happens again.” And so, we could talk all day about that. But I mean, I think that’s how business folks portray.

Christopher Marinac: [00:38:53] You know, I would have told you last week before this happened, the three reasons that banks still exist is because everybody needs an accountant, an attorney, and a banker. They need their advisors to tell them the best course of action. And the smaller the business, the more the need for those advisors.

Christopher Marinac: [00:39:11] And I feel like community banks do a really good job of supporting those small businesses. And if anything, episodes like this really kind of make that even true, because they could pick up the phone and see somebody, they could go in the branch and walk through a problem they have.

Christopher Marinac: [00:39:27] Confidence is a very fleeting thing. If you go into a bank branch and have a question and someone answers your question, it helps you out, you’re going to feel better about your situation, about that relationship. And as that compounds, it really solidifies. This is a time that I think banks will step up and be able to really support and say, “No. We’re not Silicon Valley Bank. We’re totally different here at Bank XYZ. And this is where we can add value to you. What do you need help with?”

Christopher Marinac: [00:39:53] And that’s something that I think is still very much lost by our friendly financial media, the Twitter crowd, et cetera, et cetera. But that’s okay. We’ve had that happen before. It’s not really a surprise. We just have to deal with it and try to set the record straight with the facts, the right data. And that’s what kind of gets me out of bed every day.

John Ray: [00:40:14] Well, and that’s why we turn to guys like you to help sort through all this stuff. And to your point and you referenced the experience with PPP loans, I think that really makes a lot of sense here. It really puts a premium on those banks where a business owner can walk in and talk to somebody with some authority as opposed to the teller of the day and find out what’s going on. And that’s really what you’re referring to, right?

Christopher Marinac: [00:40:45] Absolutely. Absolutely. And one other point that you would appreciate is, we used to see banks giving 80 to 90 percent leverage on deals all the time. In the last 10, 15 years post-financial crisis, that really changed. A lot more 60 percent leverage instead of 80 material difference. Today, you may see people getting 40 percent and 50 percent leverage.

Christopher Marinac: [00:41:08] And so, one of the things that’s been in my mind the last few days is we may still see loans happen. We may have less of them. But they’re going to be really tightly wound loans where you’re borrowing just to help you get a little bit of leverage on your business, on your property not to get the max. If you want to get the max leverage, you can call an equity debt fund who will charge you 12 percent or 13 percent. But a bank is going to probably charge you six or seven in today’s world. And so, that is a material difference.

Christopher Marinac: [00:41:38] And they’re going to ask for a lot of collateral, and that’s going to be a really well underwritten loan. So, the system has better behavior than it once did from a lending perspective. We, obviously, have botched the behavior on the funding side and particularly on having big deposit accounts at Silicon Valley. But, again, I think to your point, which is accurate, it’s a one off situation. We’ve also seen banks kind of realize that maybe having CDs and maturity deposits is a good thing.

Christopher Marinac: [00:42:09] I meant to mention earlier, John, Silicon Valley had almost no CDs. They had no term structure in their funding base. So, if you look at banks over the last 30, 40 years, when you have too much of one thing, it creates an imbalance. And I think the investment community, myself included, are somewhat guilty of thinking that CDs were a four letter word, when really it’s all about balance.

Christopher Marinac: [00:42:31] You know, it’s like mom saying you should never have dessert. That’s probably not right. You just don’t have to have a lot of dessert and eat your vegetables first. And it’s all about balance on your plate.

Christopher Marinac: [00:42:42] So, that’s where I think the industry has definitely missed a beat here. But that can be fixed. That’s a solvable issue. And I still think that the system is in way better shape than we think. And what concerns me a lot is the regulators love to be in power and they’re absolutely flexing their muscles here. I didn’t understand why Signature had to get closed. I think there’s definitely politics there.

Christopher Marinac: [00:43:05] There is a fraud at FGX. It’s going to come out, I think, in the lawsuit that goes on with Sam Bankman-Fried. And I’ll be curious what he knew and why he knew it and who else knew about it. Because it awfully seems mysterious why we had to close Signature Bank. So, it’s probably stating the obvious, but it’s important to kind of put that into the context.

John Ray: [00:43:26] Yeah. Wow. That’s probably a whole nother conversation right there. Wow.

Christopher Marinac: [00:43:31] I’m sure.

John Ray: [00:43:33] But we’ve been talking to you with your phone ringing off the hook, so we probably ought to let you go. Chris Marinac with Janney Montgomery Scott. Chris, thank you so much for taking the time to visit with us and clear all this up for the average business owner out there. We appreciate you and the great work you do. So, thank you.

Christopher Marinac: [00:43:53] No problem, John. Have a great day. And I appreciate the opportunity.

John Ray: [00:43:56] Yeah. Thank you. And, folks, just a quick reminder, if you have administrative tasks, bookkeeping issues, other problems in your back office that are weighing down your business, I’ve got a solution for you. It involves picking up the phone and calling Chief Executive Angel Essie Escobedo at Office Angels. Her number is 770-442-9246 or go to officeangels.us.

John Ray: [00:44:26] And what you’ll find is that Office Angels has a team of angels. Yes, they’re angels. I know that personally because I use their services. They fly in and get the job done and they fly out. And they work on an ongoing or as needed basis. So, if you’re needing talent and experience that is necessary to apply to your back office to create and maintain your business, give Office Angels a call. And I think you’ll be glad you did and let them know that we sent you.

John Ray: [00:44:58] So, for my guest, Chris Marinac, I’m John Ray. Join us next time here on North Fulton Business Radio.