最近听了一个帮美国社区银行管理资产负债表的专家的采访，挺有意思
Scott Hildenbrand, the chief balance sheet strategist at Piper Sandler
总结：
用户的存款行为导致存款自由出入波动超过了历史经验，小银行现在为了留存用户要支付越来越高的溢价，是不可持续的。未来大部分社区银行会被收购或关闭。目前虽然存款稍微稳定了一点，投资人并没有涌入小银行，因为对资产端未知风险无法预期。
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社区银行在covid期间比较像暴发户
社区银行在covid QE期间天上掉馅饼一样突然多了很多存款，并不是因为他们突然揽储能力增强了，只是因为stimulus check。但是同时他们也没有很多的贷款需求，所以把大量存款投资债券。然后美联储500点暴力加息，突然存款就跑了，面对这样的快速存款流动，加上社交媒体如twitter上面kol的煽风点火，社区银行根本无法应对。以前存款不会像今天这样快进快出的。
存款自由出入风险The flightiness of deposits：
加息一开始存款成本beta很低，对加息不敏感，慢慢的存款成本开始追上，因为储户有很多选择，包括国债、货币市场基金，如果在一家银行存款没有收益那么就转到其他银行或者其他资产. Scott承认银行业界以及监管没有足够关注的是在高利率环境下，科技、社交媒体和存款前方的人口变化对存款流动性的影响。
小银行对加息的态度180度大转弯
在08年金融危机以后，银行挣扎于低息环境，资产端收益率很萎靡，所以2021年底银行都很期待加息。但是加息了9个月以后行业的态度变了，每家银行都在寻找对冲加息影响的工具。
主要的对冲工具
资产端把固定利率的按揭通过衍生品置换成浮动利率，而负债端则把浮动利率置换成固定利率，以应对higher and longer 的加息场景。（我怎么觉得要是进入降息环境这又是一个雷）
$区域银行ETF-SPDR(KRE)$ 再也没有回到3月高点
虽然很多银行股价都低于1x 市净率，主要投资人对资产端的环境未知因素太多，没人敢下注。
大银行如$摩根大通(JPM)$ 明显受益
大银行不严重依赖利差生意，有更多手续费收入。也不需要为了留下存款支付太多溢价。小银行现在需要为了存款留存支付越来越多的溢价，息差会受到严重拖累。
小银行的优势
小银行提供个性化服务，与本地企业有着密切的联系，并为社区的经济福祉做出贡献。认识到社区银行的重要性，监管机构必须在促进竞争和确保银行体系稳定之间取得平衡。
小银行的整合
由大型机构推动的银行业整合趋势对小型社区银行的存在构成了威胁。Scott认为未来15-20年最终目前的4000家社区银行会缩到200家左右，一方面是高存款成本无法盈利，另一方面是社区银行所有者难以找到合适的继任管理者。
金融科技对小银行的帮助
小银行缺乏开发app和网上银行的预算和规模效应，金融科技的贴牌输出可以帮这些银行提供更多的线上服务和自动化体验。
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Joe (03:46):
Well, I'm very excited today. We have the perfect guest, someone who worked directly in this space and has for a long time. We're going to be speaking with Scott Hildenbrand, chief balance sheet strategist and head of financial strategies at Piper Sandler. Scott, thank you so much for coming in.
Scott Hildenbrand (04:02):
Good morning Joe and Tracy. Thanks for inviting me in. I'm thrilled.
Tracy (04:52):
So next question. How busy have you been over the past three months?
Scott (04:56):
You know, Tracy, it's interesting. It's the first time I think my family and friends know what I do for a living. It has been incredibly busy to the point where I can't even go play golf with friends without the words "Silicon Valley" or "hedging" or "uninsured" — all those types of terms popping up. And I do a fair amount of public speaking and a lot of people want to hear about what's going on, what are others doing and thinking about post-drama. And I love the way you all described it, the drama around the Silicon Valley, et cetera.
Tracy (05:47):
So why don't we do a little bit of looking in the rear view mirror first, and then we can move onto what we've been seeing currently. What happened in March? How would you characterize the drama that we saw?
Scott (05:59):
Sure. I think what ultimately happened, and again, being an asset liability nerd that I am, all I have done for 23 years is modeled balance sheets. So I take assets, I take the liabilities, I take changes in rates, and we try to determine the impact — what happens to those balance sheets. One of the things that we were taught very early on, and almost everyone who's listening who's ever modeled an interest rate risk for a bank, will tell you that the deposit side of the world is the ultimate hedge against higher rates. Right? And so if you had told me, Joe or Tracy, five years ago, you had me on here and you said, "there's a bank and all they're going to do is buy treasuries and all of their deposits are in checking accounts. And by the way, they're going to fail." I would've laughed at both of you. I wouldn't have come back. I would have been like, "you all are crazy."
So literally in March, Tracy, to answer your question, I think everything was flipped upside down. What we had all learned was the fact that operating accounts and checking accounts are great until they're not. And what we've learned also is that while it's been a slow bleed, Joe, you were sort of talking about this, we finally all now realize that there's really no contractual liabilities or deposits on a bank balance sheet anymore. People can move money a lot faster.
Bank balance sheets are more athletic and nimble. You couple that with really what happened, if you think about it too, is from an M&A perspective, there was no M&A during 2020 and Covid for those couple of months. Yet every single bank in the country did one, they didn't realize it. They got no assets. An enormous amount of deposits were dumped into the industry. They didn't ask for it. Major growth on a deposit front, interest rates at zero and no lending anywhere. So you think about how ballooned those balance sheets got. It's not like banks woke up overnight and all of a sudden became fantastically better at gathering deposits. So those balance sheets looked a lot different.
And then fast forward, we were a little late to the inflation game. You go up 500 basis points in a very short period of time. You have Twitter and the social media role here, and then all of a sudden everybody got spooked and dollars started running out. Not like the WAMU days or not It's A Wonderful Life. It was three hours and $42 billion. That's what happened.
Tracy (08:04):
This is kind of the dark side of the app. The flightiness of deposits. You can pull everything out with the click of a button.
Joe (08:13):
Banking 101, probably even pre-101. Why is it that deposits are an interest rate hedge?
Scott (08:26):
Sure. So in theory, over the years, historically, most of us all have checking accounts. We've got savings accounts. And predominantly, if you think about it, banks make money not because of the asset side or the lending. It's because they don't pay at market rates on the deposit side. Right. Checking accounts, nobody really cares what you're making on your checking account. As long as the app works, you move your money around, you're good. I think what ultimately happened is for years and years you'll hear the term "beta." And it's not from an investor perspective, it's in the bank world.
Everybody likes to try to project every time the Fed moves, how much does a bank have to move their deposit rates to keep money in? And forever, it's kind of been this 30 to 50%. I've never really subscribed to it. And that's a separate topic. But typically that's what we've seen historically. But unfortunately what it doesn't measure is the fact that not only is it a rate that we have to pay, but dollars can move so much faster based on the technology. And I'd argue the demographics.
Here's the bigger issue. If you think about it from an asset liability perspective. I can't model the demographic breakdown well enough yet you think about my father's generation versus my future grandchildren's generations. And you think about how they view a bank the way you all were describing it today. There's a loyalty trust matrix. And you think about the loyalty. A lot of loyalty in my father's generation and very little trust. He gets a $2,000 check. He is going to a branch, he is going to make sure that money is in. He gets his lollipop, he says hi, and he leaves.
Then you think about the generations beneath below, there's a ton of trust. They'll move money around on phones, they don't even know the name of the bank they're banking at. They'll move it so quickly. But there's very little loyalty. And therein lies the difference in why we're struggling with how to determine how to manage and hedge a balance sheet from a deposit perspective.
Tracy (10:12):
Maybe the banking app should figure out a way to deliver lollipops.
Scott (10:15):
That's right.
Tracy (10:17):
Can I ask another step-back question? I was a banking correspondent soon after the 2008 financial crisis. And I remember the big hope of banks back then was “Interest rates are going to rise and we will finally be able to make money off of lending.” What happened to that portion of it?
Scott (10:36):
That's the best question I've gotten around this topic over the last 90 or a hundred days, Tracy. And I'll tell you why. If I had a nickel for every bank that told me in January of 2022, so not too long ago, that they couldn't wait for rates to rise and were prepared for rates to rise. "Scott, we're going to look so good. It's coming. Finally."
I mean I, for honestly, I've been doing these 23 years, I could have taken the first 20 years off. Everybody told me rates were going higher. They never moved. It was very low interest rate environment for 20 years. Finally, we see interest rates higher, Tracy. And it took about, I don't know, nine months until everybody called me and said, "We need help hedging against higher rates." And I'm like, well, wait a minute.
But ultimately what we didn't realize, right, what we didn't factor in is the fact that yes, when the Fed hikes interest rates, and it's why you saw 2022 in the first six months, we saw great margin expansion for banks, which was phenomenal. The asset side was resetting higher and nobody was paying up for deposits because it wasn't based on the Fed, it's based on supply and demand. And we had so much supply of deposits after Covid, right? It took a while for anyone have to have to pay.
Then all of a sudden, we had to pay as things started to catch up, Treasury rates got a lot higher. But here's the bigger problem. Everybody was looking at their balance sheet as if it would stay the same in terms of product mix, in terms of size. And ultimately what happened is everybody said, well wait a minute. I can move money all over the place, not only to different banks, but banks were competing against treasury rates, right? So all of a sudden people move their money around a lot faster.
So we always say it's not changes in rates that caused it, it was how athletic bank balance sheets are today versus where they used to be. And it moves a lot faster, Tracy. And that's where people got caught.
Tracy (12:12):
And just a follow up based on that, how much of the concerns that banks tend to have are shaped by things in the stress test? So I'm thinking back, worst case scenario of the banking stress test for a long time was a recession and rates going very, very low. It didn't really have much — as far as I can remember — there wasn't that much modeling based on rates going really, really high. So does that tend to shape bank behavior? Like is that the scenario that they end up worrying about?
Scott (12:46):
This was the double whammy. You're right. If you think about, you know, if you polled a hundred CEOs throughout the country and it was two years ago, even four years ago, 10 years ago, and you say, "what's the worst scenario?" They tell you, "well, rates down to zero probably means recession, we've got credit problems, et cetera. That's going to be a really tough environment for us."
Where I think we didn't focus enough on is really understanding the impact that both technology, social media, and the demographic changes around the deposit front from a liquidity perspective in a higher rate environment. This wasn't, "we have to slow the economy down because it's booming organically." This was, "hey, we're going to throw way more money into your industry than you asked for, and then we're going to suck it out in record pace. And by the way, we're going to do it over a nine month period and hopefully you're prepared to handle that."
Joe (13:49):
I want to talk more about the demographics and really these long-term structural changes. But before we do, I just want to sort of like ask one more question about the post-SVB environment, like KRE, the regional bank ETF is actually still lower than it was on March 13th. Like they've stopped spiraling , but the valuations you mentioned, I guess like deposits have been stable. But there's clearly been this huge repricing of the sector that has not bounced back since then. I mean, it's flat, like there's not, everything else has rallied. What about this moment either sort of perceptually or business-wise, like really has changed how people view the viability, the business prospects of these banks?
Scott (14:31):
Right. There's well, as you know, in both M&A and in valuation, unknown is a problem, right? And so you've got a few unknowns, Joe. You've got regulatory issues coming, further stress, more capital, what is it going to be? Whatever it is, we all know it's going to hurt earnings. Right?
Joe (14:48):
Even for the regionals, correct?
Scott (14:49):
Yes. It'll trickle down. There'll be some impacts. And then, you also have — I talk to a lot of investors — and to your point Joe, you know, almost half the banks in the country trading below their tangible book value. It's almost weird for me to say that. And we really haven't seen any credit losses yet. The problem is almost every investor I talked to, whether it's unknown around what we just talked about, the regulatory environment or quite frankly unknown around interest rates or the final one, is unknown around credit. And I haven't met an investor that's excited about the credit environment in which we're headed into.
I think the real problem is we're sort of stuck in this “nobody knows” mode. I'd rather us, you know, let's take some hits here. Let's have some credit concerns and, and start to deal with them. We're waiting and waiting for the hurricane, but it hasn't come and it might not be a major hurricane, it might be small. We just don't know. And so from a valuation perspective, it's tough for anyone to invest in anything from that perspective.
Joe (15:45):
And just real quickly, the deposits have settled down, correct?
Scott (15:47):
Right.
Tracy (15:49):
So Joe mentioned that KBW Regional Banking Index. Can you talk a little bit more about the differentiation that we've seen between the big banks? So the JPMorgans of the world, which seem to have been massive beneficiaries of these liquidity issues, the regionals and then the really small community banks? Because I think a lot of the community banks ended up getting lumped up in the regional category, but actually they seem to do okay.
Scott (16:15):
Right. And I think the biggest challenge right now is exactly the way you lay it out. If you think about it, the largest banks in the country rely a lot less on deposit-in-loan-out. Right? They make a spread, but they don't live and die by their spread business. The smaller the bank you get, the more they rely on spread business. And that's a problem when you've got an inverted yield curve, you've got to deposit costs that continue to elevate. They've stabilized — Joe, to your earlier point. They've stabilized from a balance perspective, but I don't believe we stabilized yet on how much it costs me to keep people here or the concern around how much I'm going to cost to keep people here. So you've got margin compression for the smaller institutions who have very little fee income. You think about JPMorgan, they've got revenues all over the place in all different business lines.
But it's really true. If you think about scale in a world that I think across the board... Bank margins will continue to be lower apples to apples in any rate environment because we're probably going to have to hold a little more liquidity, probably have to hold a little bit more capital and certainly have in the rear view mirror of what happened at Silicon Valley. Yet Tracy, to your point, there's maybe five banks that look like Silicon Valley out of 4,000. Yet the others are going to pay for some of that as well. And that's hard,
Joe (17:56):
You know, right around the time of Silicon Valley, I did a little bit of traveling. Tracy and I were in Chicago, for example. Not long after that I went to like a wedding in Boston. And the only reason I bring that up is that when you're in a new area, I find you just see all these banks you've never heard of these. Like tiny local banks.
I'm probably making it up, but it's like the Medford Community Savings Bank outside of Boston and the Third Bank of Illinois and just all these like branches. Talk to us about — essentially setting aside rate compression and rates go up and down and we don't really know what the future — like this sort of like operating business these days that they're in and the sort of challenge they have of like bringing in new depositors for a local bank again when I could just like go on, you know, job.com.
Scott (18:45):
You're right Joe. And it's one of the things I do too. It's just I happen to know all those banks as I travel around, but it's the same one. I'm like, "oh, that's where that's located." But as you think about their business, right? Yeah. All of those smaller banks, most of those smaller banks were started in the community. Folks at the schools, at the churches at the country club started this bank in town and everybody kind of banked in that town. And you think about that worked for a long period of time.
Back to that loyalty trust component. It was a lot of loyalty to who you banked with. You fast forward to where we are today. And you think about the demographic changes. You think about 10, 15, 20 years ago, Joe, a bank balance sheet. The community bank world had almost half of its deposits in CDs. I bring that up because if you think about it, that gave banks time. You have a one-year CD on your balance sheet rates. Don't move on those deposits for a year. No matter what rates are doing. You fast forward to where we are today. And you think about two things. The average age of a CD holder is a lot higher than you would, than you would guess at almost any institution in the country.
Joe (19:47):
Who's the youngest person who even owns a CD in the United States?
Scott (19:51):
I'm looking for that individual. I want to know who it is. But you're right. It's really that demographic has changed. But that's a really important point because as banks are trying to grow deposits, they're out there trying to reach in CD world.
Yet I do a fair amount of interviewing for folks at originally Sandler O'Neill, now Piper Sandler who want to come to New York learn about community banking and way smarter than I am. And they ask me questions I can't answer, but I always have a question they can't answer. Do you know what a CD is? And they've never heard of it, whether it was banking or music. And yet then I'll go to the next boardroom, I'm in the next bank and they'll say, now we're going to fill the liquidity hole. We're going to go out and run a 15-month CD special.
The game has changed, the demographics have changed. People want CD rates with money market flexibility and operational flexibility. And that is the biggest dynamic we're seeing for the smaller community banks. And that's what happened. Back to Tracy's earlier question, the deposit world and how much we can hedge with the deposits is going away quickly without those CDs. We have no contractual liabilities on most bank balance sheets anymore.
Tracy (20:50):
On the deposit beta point, I mean, there are some banks out there that are offering very competitive rates, at least compared to others. And you are the perfect person to answer this question, but what are they doing that others are not? And you know, I get that scale is a factor here . So if you're big, you can maybe afford to return a little bit more to depositors, but maybe for some of the non-mega banks, is it riskier lending?
Scott (21:19):
Right. Great question. And most of it comes honestly, Tracy from supply-demand. And what I mean by that is, if you go and did a scan of one of — and it's a very high-level metric — but one of the metrics I love to look at for banks in the country is loan to deposit ratio. And when you start seeing that number get closer and closer to 90%, then up to a hundred percent, you better bet that those institutions, that's where you want to keep your money. Because they're going to pay whatever they have to pay to keep money in there. Both from a liquidity metric, a regulatory metric to keep that loan to deposit ratio within reason so that they're not an outlier. Right. And so you're seeing a little bit of that. You're seeing a little bit of, quite frankly, most banks will tell me right now, they're willing to pay those.
Today I was in Chicago, I was in an airport, I got to the airport and on my car ride this morning, I saw a CD for 5.35%. I thought to myself the same thing. Does that mean a typical bank margins 3.5%? Are they putting on loans at 9%? Most banks aren't. And so it begs the question of... You're going to see margin compression. I think I've never met a bank that told me they're going to be less than assets next year than they are this year.
I think you're going to meet a lot of new banks that are going to be a lot smaller than they were a year ago because it all of a sudden doesn't, doesn't make a ton of sense financially. But right now we're still stabilizing and willing to pay up a little bit. But over time, Tracy, as that stabilizes those rates, I expect them to start to come down a little bit. Because I don't see loans catching up and making the equivalent yields that you need to.
Joe (26:42):
No, that's great. I was interrupting you, but it's because you sort of anticipated my next question. So like, community banks strike me as one of those things like mom, apple pie and baseball, which is like, everyone's loves the idea of the community bank, right? And politicians, you know, my understanding is that actually in DC the community banks are pretty well represented and that politicians like to... You know, "well my bank and my constituents' bank." Tulsa get the same treatment as the fantasy New York banks and all that stuff. What would be lost in terms of like what is different about community banks in terms of both the relationships but also like their asset mix and the type of business that they do that goes away if they have trouble remaining robust businesses?
Scott (27:25):
I think we've got a great example of it and it was so many other things going on, Joe, that we didn't maybe notice it all the way. I give such tremendous credit to the community bank space during Covid. Because if you think about how quickly they reacted PPP and were able to get out and meet their customer's needs at a very, very challenging time. It was a short window of challenge, right? But it was a very scary time in terms of the small business side of the world being helped out. And the largest bank said, we understand what you want us to do, but we remember '08 and how much I got in trouble for getting involved in this, so we're going to slow play it a little bit. Whereas the small community banks, I'm telling you, I was really proud to know a lot of them.
I had a friend call me who said his father ran a small business. He said, "hey, could you get my dad? He banks at XYZ bank. Could you actually get him in touch with..." I called the treasurer, we made the connection, he got his money and it just felt really good that there was that dynamic. So I think there's something there, Joe, that I think banks do a great job of helping their clients. They do a poor job marketing.
Joe (28:31):
I think that's a great example. Is there something in the asset side or the loan side where there are still like... Whether it's real estate, certain types of real estate transactions, maybe like medium and small business type loans. Like that's, "I want to build a little factory and where actually it's, there's like a clear advantage to like the local bank that knows the space." Yes. Because that's like the theoretical idea. They know the community and they can do this, but like, talk to us about how that actually plays out.
Scott (28:59):
Sure. It plays out a lot. And I'll tell you the asset side is really becoming where banks can try to differentiate themselves on service and relationship and knowing the community. I know my dad's on a board of a country club and he's probably embarrassed I'm even talking about it. But he was telling me how the bank that was serving the country club that wanted to do some work and wanted to get a loan, but the loan was like $2-3 million and they think that's a lot of money, right?
To a large bank that's almost not worth the time. The risk, the headline risk. He said there was two or two or three small community banks willing, hustling, wanting to be helpful, who know the market really well. And so that's a great example. Again, I just think the nimble and athleticness of a community bank versus the largest is really one of the advantages that are there that they need to play up more. They need do a better job of that, I think.
Tracy (30:00):
Okay. So smaller banks might have better relationships, might do a better job of small business lending or supporting the individual community. The big banks have economies of scale that make it possible to earn a relatively decent return at various times. I'm going to ask the big question, but putting it all together, what does the ideal banking system in the US actually look like? How should we balance the small banks with the big?
Scott (30:29):
Yeah. Great. Great question. And again, it's a very difficult one to answer. You know, spot on Tracy. But my own gut, my own kind of experience. If we're at 4,000 banks right now, we're probably heading somewhere towards maybe a couple of hundred banks over the next 10 to 15 years. And I think there's room for the largest and I think there's room for the community bank world, and maybe I'm being a little light,
Joe (30:54):
Wait. We might only have a couple of hundred banks?
Scott (30:57):
I'm thinking over the next 15 to 20 years really. And I think what you're going to see are, you're going to see great bankers merging together to really start creating more of the mid-size smaller regionals.
Joe (31:09):
Wow.
Scott (31:09):
That can deliver better service and have more economies of scale. I really believe that, and I'm probably going to get yelled at for saying the number. Yeah. And maybe it's a bigger number than that, Joe. But in my mind, the way I think about it when I started there was double the amount of banks, and so we're heading in some form of that direction, partly because of what Tracy said, de novos aren't really out there to fill the need.
And there's a lot of benefits from putting couple of these great banks together so that they can offer a wider scale, economies of scale, better technology, better cyber security components. So I think you're going to see less banks, but I think more of them will be able to battle the largest ones if they team up a little bit there.
Joe (31:48):
Some company is making a fortune basically offering white label apps and fraud prevention services, et cetera, so that these banks don't actually have to have any of that expertise in-house.
Scott (31:59):
Yeah. I would tell you, and you hear a lot in our world, the fin-tech world. The fin-tech world has been great for the community bank space because there's a lot of teaming up, right. The fin-tech world does a great job creating an app, creating a mechanism that tracks — to your point — that or loan origination or whatever they can.
And the banks really opened their eyes about five or six years ago and said, we can really team up here. We've got great balance sheets. Love to work with the fintechs on combining and finding the right technology again so I can battle the largest companies that we compete against.
Joe (32:33):
Just going back to the demographics point. Is there anything that you're seeing that's interesting? On that front in terms of banks trying to either make deposits more sticky or maybe attract that new younger base of depositors?
Scott (32:49):
Right there hasn't been anything that's been completely outside the box that I've seen yet. And I'm always kind of looking for it. One little anecdote I had a couple of years ago, maybe two years ago, three years ago now. I remember speaking with our interns, there's about 30 of them. And I asked each individual, I said, "why do you bank where you bank?" And 50% of the folks in that room, maybe 60% said to me, "well I bank where my parents bank." And so that was like, okay, the community bank world has a chance here to try to capture the beginning. Right. You have the beginning of it. Do you know what the other folks were saying? Well, my bank offers a free one-year membership to Spotify. So I googled what Spotify, I don't know anything.
So I googled what Spotify is and I realized it's the same version, Tracy, of what we were doing 20, 30 years ago. You remember the stories of getting a free toaster if you opened up a checking account?
Tracy (33:34):
Oh yeah.
Scott (33:35):
It's trying to change the sort of component that leads you to do it, but it sounded very similar to that process. So I see some of that working, things like that. But I also think it's the education side of it. It's offering your branch now isn't a branch the way we used to think of it. It's more of a community center. It's almost like a Starbucks come on in, hang out, get to just spend some time here. You'll meet other folks that are doing some business like you all. Things like that. I'm seeing a little bit. And that tends to sometimes work as well.
Joe (34:03):
Wait, Tracy, what's the coffee shop that's in our building?
Tracy (34:06):
I was just thinking about that. I think it's like a Capital One bank branch slash coffee shop as far as I can tell.
Joe (34:26):
You know, Tracy asked about demographics of depositors. You told the story of your dad on the board of a country club. And so I have a certain image of like what the age of the board of a country club is. And I have a certain image in my head of like the type of people at banks who have relationships with the board of a country club. Can you talk about the demographics on the employment side of the banks, and like hiring new talent and the challenges there?
Scott (34:53):
Sure. No, that's another one that I see a lot of as you travel around. People will tell you, one of the drivers of M&A is succession planning. Very, very difficult to get folks to find the talent, to find the individuals that really want to run these community banks. So at times when you look at a deal getting done, sometimes it's really done because from a succession planning perspective, you'll see that more and more.
So I think there's a real challenge there. Again, I think it goes back to banks do a great job on social media in terms of monitoring their employees. What I think they do a terrible job of is marketing and getting the excitement about how they're different, what they're doing to try to attract that younger talent in.
Everyone used to go to the top five or six banks in the country. They had great training programs and then those individuals would leave those training programs and go run all the community banks in the country. They don't really have those programs anymore. So it's difficult. Yeah. It's difficult to find individuals that really want as much as they used to be. And so that is a real challenge as you think about a growth component of most boardrooms I'm in, the average age is on the higher side for sure. And that makes it challenging.
If you think about the demographic overhaul we're going through, it's not just lending. It's the deposits side. Banks don't underwrite their depositors like they underwrite the loans. And we've have to start doing that with better representation on the board. Folks that are truly going to maybe try to help you from a social media perspective, from other ways to gather those deposits and meet new demographic needs.
Tracy (36:28):
So just going back to March's banking drama. So it feels like some of the really extreme deposit moves have started to moderate now and at the same time you have the Fed coming out with potentially additional capital requirements for larger banks. I take the point that you'll probably see some compression on net interest margin going forward as people have to compete with deposits, but what's the next big, I guess, concern or thing that's keeping up bank executives or your clients?
Scott (37:00):
Sure. I think it's the, you kind of go from the unknown, like you said, we're going to have higher capital requirements which are going to drag into earnings, which is ironic because Silicon Valley's problem wasn't capital. But anyways, I digress, right? But we'll move forward. I think then you start thinking about what's keeping them up at night is the fact that perception or reality.
Scott (37:33):
But that Monday morning you weren't going to your board and saying, "you know what, I'm going to move our deposits to bank XYZ you've never heard of. I'm going to Jamie Diamond at JPMorgan and I'm going to bank there." And that's to me why, apples to apples, a community bank is going to have to pay more for liquidity than the largest banks in the country.
That keeps them up at night. And hedging in general. I run our derivative business. Separate from some of the other things I do. Our derivative business skyrocketed because derivatives are used to hedge interest rate risk. And we used to not have to use them as much because the deposit side of the world. Now with this deposit concern around the optionality risk, for lack of better terms, derivative use has exploded. I'd like to think it's because I'm really good at it. It's not, it has nothing to do with me and has everything to do with the market. And I work on a wonderful team, but that's really what's going on from that perspective.
Joe (39:32):
This was the missing piece. because you know we talked to Terry Duffy. And he was like, if you wanted to like hear about their hedging business, they don't do it through the CME, they do it through the banks. And this sounds like they really were cranking it up.
Scott (39:44):
One of the things I do is I go to boards and I go to management teams. I look at the balance sheet, I look at the interest rate risk position and I say, "you have now some exposure here. Let's show you the derivative transactions."
Joe (39:54):
That makes sense.
Tracy (39:54):
Are there particular products that are getting really popular?
Scott (39:56):
Yeah, I would say there's a few. A lot of folks have a lot more mortgage book . Their mortgage book is a lot bigger than they wanted it right back in 2021. Everyone has a mortgage, it's not going anywhere. So what a lot of banks are doing is swapping that fixed rate asset to a floating rate. To reduce their interest rate risk from a higher for longer perspective.
That's one area. The other area is on the liability side, it's the reverse, but the same concept. They're paying fixed on interest rates swap in the liability side and locking up their cost on short funding for a long period of time. Those are very, very popular transactions on the derivative front.