Headlines were flooded with the news of the Silicon Valley Bank (SVB) collapse, leaving consumers with questions and uncertainty. Banks and lenders, on the other hand, are trying to restore consumer confidence and make the next best move. Total Expert’s James White and Dan Catinella join host Joe Welu in this episode to make sense of the news, break it down in simple terms, and outline the opportunities. James and Dan offer tactical advice for banks and lenders on how they can lead with education and advice when engaging with their customers. As the saying goes, “Never waste a crisis, but rather lean into the growth opportunity.”
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Silicon Valley Bank (SVB): What Happened And The Opportunity With James White And Dan Catinella
I am joined by two of my best pals here, Mr. Dan Catinella, our Chief Lending Officer, and Mr. James White, our GM and Industry Principal for Banking. How are you doing, guys?
We are great.
There’s been a little bit going on in the world in the last few days. I thought we would come together and have a discussion about Silicon Valley Bank, SVB as they’re known by the people that know the organization. We will talk about that and what happened. Also, we will talk about what the opportunity is right now surrounding all this dislocation that we’re seeing. I want to start out and talk about Silicon Valley Bank, the collapse.
A couple of weeks ago, a lot of people didn’t even know who Silicon Valley Bank was or why it was important. For those of our audience that don’t know and haven’t been reading the news, they’re the preferred bank to much of the tech community. I think upwards of 50% of technology companies bank there. They had a very abrupt decline and were taken over by the Feds. That has caused some dislocation in the market.
I want you to start out guys and talk me through exactly what happened. Simplify it for those in our audience that haven’t had it explained in simple terms. James, I’m going to let you expand on this. From the way I understand it, they had a mismatch in the duration of the deposits. They invested in securities, treasuries, and MBS or in bonds essentially. They had a duration mismatch. Meaning they were in longer-term securities and they had a bunch of deposits that were potentially needed in the shorter term.
When interest rates started going through the roof, those bond prices fall, which is not a problem if you can hold those bonds to maturity, but if you need to access the cash, meaning you need the liquidity, you have to sell them at a discount, which is what happened and what propelled this thing. I’m generalizing, but give me your take on it. Tell our audience what happened.
If you don’t understand banking, a little bit of confusion point is that deposits are liabilities and loans are assets. Oftentimes, people may get that flip-flopped. What that means is when you receive deposits as a bank, there’s a cost associated with holding those deposits. If you think about the systems that process deposits, they generate statements every month and all those things. They have to find ways to invest in them. They have to earn some type of income off of those deposits, otherwise, they’ll continue to lose money. What happened was they received a tremendous amount of deposits and they weren’t able to offer enough loans to offset those deposits to generate income. They have to find other vehicles to invest those dollars in.
Deposits are actually liabilities, and loans are assets. Oftentimes, people may get that flip-flopped. Click To Tweet
Let me drill into that a little bit. I want to get to the point where everybody may be saying, “This has been in the news a lot.” Our focus in this episode is to talk a little bit more about what happened, but then get to why is there an opportunity for those that are paying attention. What you’re saying is there was so much money coming in the door that they hardly knew what to do with it. Is that what you’re saying?
Yes. They couldn’t generate enough loans fast enough to offset it. They have to find ways to invest to get some sort of return. Bonds are typically a very safe way to do that. If you can hold them until term, then you don’t have to worry about high risk. If you lend out the money, you may not get it back as an example.
In hindsight, they should have invested in much shorter-term bonds.
For sure. They wouldn’t have got as much of a return, but they would’ve been able to invest in those shorter bonds.
Essentially, this is my understanding. I’m making no judgment about leadership decisions at Silicon Valley Bank. I am just trying to understand the facts here. A lot of people are saying they were underestimating the potential increase in rates and the velocity of those interest rate increases. Is that where the mistake was?
That’s one of them. The other was not having a diverse portfolio, both of customers and investments. They were very narrow from a portfolio perspective. What you see when the rates rise this quickly even for other financial institutions is people typically are going to chase those rates. If they have no loyalty, they’re going to take those dollars and move them over to another institution where they can get to 3%, especially on millions of dollars.
I was having dinner with one of our bank customers. They’re about a $2.5 billion institution. I wanted to know. I’m like, “Have you guys had pressure?” He was like, “Basically, no. They were the beneficiary of this.” In your mind, I know the regional banks have had pressure on them. We saw the First Republic. I guess they’re super regional, depending on how you categorize them. Where’s the pressure at?
Let’s separate Silicon Valley Bank from the rest of the banking world because arguably, you can look at SVB and say they were unique. Their customer base was not very diversified as you mentioned, or at least that’s what we understand. How does it compare to the rest of the banking ecosystem? Where is the pressure coming from? What are you seeing, James? I know you monitor this closely.
First off, I want to be clear, I’m not even remotely saying that other financial institutions are about to be in the same situation that Silicon Valley Bank is. I think Silicon Valley Bank is the situation that other banks and credit unions are seeing on steroids, which is people are starting to chase higher deposit rates. The first ones to do that are commercial deposits because they’re larger balances.
When we talk to financial institutions and I’m able to look at and analyze their balance sheet, a lot of them are having deposit runoff. That’s because of those rate chasers. That is very much a problem for about all banks and credit unions, but that doesn’t mean that they’re going to be in the same situation as Silicon Valley Bank because they have more of a diverse portfolio and less risky investments. They also have less large dollar depositors. It would take a lot of depositors to leave your average bank.
I don’t have any numbers in front of me, but a lot of the community banks and regional banks’ depositor base falls under the $250,000 FDIC insurance limit. Their deposits are protected.
The average bank’s average deposit is about $35,000, and this includes commercial deposits. It’s nowhere near. For Silicon Valley Bank, $1.2 million was their average deposit.
I think it’s important to put some context around this. All of us talk about the media, the hype, and the panic that starts to set in, and how people don’t necessarily look at the data and the facts. They start acting with emotion and essentially panicking. It is important to understand what is happening and what’s at risk.
The government stepped in and backstopped the depositors for SVB. There are some rules of thought that maybe they shouldn’t have done that. That happened to be in the camp that says it was the right thing to do with the information that we have. If you didn’t do that, you would’ve had a pretty chaotic extinction-level event for a lot of organizations because it would’ve had this contagion that would’ve spread. Do you agree with that? What’s your opinion on that?
I agree 100%. It’s all about consumer confidence. That’s the narrative that you see out there. A lot of media outlets and other institutions are going to continue to throw SVB under the bus. The reason why they do that is it’s important to make sure that the consumers feel confident that the banking system is strong. It’s all built on trust, and the banking system is strong. I believe covering those deposits was crucial because you want to make sure consumer confidence stays strong. It takes a lot of $36,000 deposits to leave a bank for a bank to have liquidity problems, but it can happen with the media if you let it continue to spiral out of control.
Cat, what’s your opinion on how the lending side of the equation has been reacting? We saw a lot of volatility in interest rates, arguably driven and catalyzed by the SVB debacle. Is that your take? Give us some perspective there.
Housing and lending typically always enjoy the benefits of a good crisis.
Never waste a crisis.
Volatility has been pretty dramatic. Looking at the markets from some of the swings, the rates are swinging up to the 7% range, then falling down pretty dramatically toward the end of the week where they landed to about the 6.5% range on a 30-year fixed mortgage. We’ve also seen the immediate responses to home buyers that came back when most rates dropped and applications rose 6.5%.
I haven’t looked at the data yet, but applications for a mortgage were up 6.5% week over week.
That’s right. We’ve had some of our top clients report that they had some of their best lock days in almost nine months. We all expected mortgage rates to drop to the lower and into a 6% range sometime in the second half of 2023. With what’s going on in the banking market and some of the fears of a recession looming, we’re going to see that come at a much faster pace this 2023. The next few days are still going to be pretty volatile.
With what's going on in the banking market, we’re fearing a recession is looming, and that will come at a much faster pace this year. Click To Tweet
I think we have a high-level overview of what happened. There’s certainly massive amounts of research out there that people can go and dig into if they’re trying to understand it more deeply. That wasn’t necessarily the point of this discussion, but I wanted to level set there. We spend most of our time as an organization looking at all the data and what’s going on, but then how do we find the opportunity for our customers? When we partner strategically, where are the opportunities for growth? I want to talk about that. James, when it comes to banks and credit unions, how should they be using this as an opportunity?
This is a great opportunity to build further loyalty, especially with your younger customer and member base. Right now, we’ve dealt with loyalty issues with the younger demographics for a long time. The way the relationship is built with them is different from what we have historically with banks and credit unions. This is a great time to lean in with financial wellness, financial education, and differentiated deposit strategies. Relationship pricing would be a great example.
Let’s talk about that one because people talk about loyalty all the time. We can have a whole conversation on that. I agree 100% that it is important. When I think of loyalty, you got to build authentic relationships with customers and you can’t fake it. It has to be intentional, organization-wide, and directive. We agree with that. You said something about relationship pricing as it relates to a deposit strategy. Walk me through that.
There are a couple of different ways that you can leverage relationship pricing. One is at the individual level, how engaged am I with the institution? The more products and services that I obtained, leveraged, and used at the financial institution either benefit me in reward points if I have a rewards program or benefit me in reduced fees or reduced loan rates or increase deposit rates.
What that does is it encourages me to leverage more products and services from the institution, and it makes it more sticky because I’m not going to move my savings account from a bank if it’s going to cost me an extra interest point on my auto loan, for example. Now, you start to get very sticky. That’s one way. You also can branch that out into the whole household and even the family. You’re now starting to engage the whole household.
Let me give you my ideation on this and tell me if I’m correct in thinking about this. I’m a bank or a credit union and I’m lending money. Most of them are lending money in some capacity. I’m seeing volatility in interest rates right now. I don’t think we talked about this but what all this dislocation in the banking system and the chaos that it’s creating, a lot of people are feeling it’s going to be a catalyst just pushing us into a recession.
If that happens arguably, I don’t think it’s a question of if. I don’t see how we can avoid it. Lending and mortgage rates for sure are going to come down. What you’re saying is if I’m in the lending business and I can have a dual-pronged strategy of I can drive income from my lending business, but I can also help fix my deposit problem by having a preferred rate on those mortgages or lending interest rates, I can use that as a catalyst or a driver to increase deposit growth. Is that what you’re saying?
That’s exactly what I’m saying. As an example, think about a reduced origination fee in exchange for a direct deposit. That consumer is going to move their income deposit into your financial in exchange for a lower origination fee.
This is a concept that’s not new, but I don’t think banks, credit unions, organizations, or deposit institutions have done a great job of packaging it. Would you agree?
I would agree completely. They haven’t had to. The big thing is they are flooded with deposits and loans. They were throwing people the lending problem because they couldn’t process fast enough and they didn’t do all of the deposits. Now, loans are slowing down and there are no more stimulus checks. There are no more PPP loans. People are starting to spend some of that savings, as well as move it around chasing rates. Now, they’re having to leverage these muscles that they haven’t had to leverage in quite some time.
If I’m a banker lender or I’m a banker credit union and I’m looking at my lending and my deposit growth strategy, at the top of the list strategically, I should be thinking about what my playbook looks like to wrap a VIP-type of offering for that relationship pricing. I’m going to get customer acquisition based on that lower rate that I can offer if I get the deposits, and I’m going to bolster my balance sheet where I’m going to bolster my deposit base.
It’s now a lot stickier product too. They’re going to be less likely to chase rates.
We agree that this is an opportunity. It underscores conversations that we’ve had over this past year about being incredibly nimble right now, and the ability to pivot strategy based on what’s happening in the markets. It means, “Are you nimble as an organization to be able to go from ideation to concept to campaign to execution of that campaign? Do you think that’s a struggle for most companies?” My opinion is yes, but I want to hear your perspective.
A lot of it is cultural. It’s being able to get out of our own way sometimes and being more focused on the consumer, the customer, or the member versus the back-office processes. Deliver something that’s meaningful to the market and then build the back office behind it versus allowing the back office to dictate what’s going to be delivered to them.
We talk about this a lot internally. The velocity at which you have to iterate and be able to adapt is increasing so much. This is a perfect example of where the banking world, credit unions, and banks need to embrace that mindset and lean into it to take advantage of things like this. Dan, talk to us about the opportunity that is on the horizon potentially for the independent mortgage lenders that are out there. They’re not taking deposits but they’re highly sensitive to interest rates.
Based on data, only 1 in 4 was profitable in Q4 of 2022, but in discussion with many lenders, they’re either breaking even or they’re in striking distance from profitability. As rates drop, hopefully, that continues even though there will be some probably up and down over the next few days. Hopefully, this is the boost that the lenders needed to enter their spring market and start seeing some profitability.
Every lender needs to lead with education and advice, especially as you got a large portion of the purchase market made up of first-time home buyers that need a whole different level of education right now. Make sure that you’re packaging some of these macro factors and translating them into all the individuals who want those, “How can economic tribulations lead to my success and meeting my financial goals in the future?” It’s a great opportunity to use these touchpoints with your consumers, explain what this means for them, and show them how the real estate and housing market could build the most financial success for their future.
It’s long-term financial health and fitness. We agree that home ownership is a great strategy there, but the pattern that I’m seeing here on both sides of the table for banks, credit unions, and independent mortgage banks is the opportunity to put the stake in the ground to be that trusted financial partner, be that source of information, be that source of advice, and that trusted ally. That’s a big opportunity right now.
You can go to your referral partners, your relationship partners, accountants, wealth managers, or whatever it is in your local ecosystems, and be the source of actual factual information. Take that down to the consumers and educate them by saying, “There is a lot of panic in the world right now when it comes to the financial markets, but let’s ground the facts. Let’s ground on the data.”
If you look at the last 50 years and you compare renting to home ownership, it’s not even close. That’s what you’re getting at. Talk to me about the Gen Z opportunity or the first-time home buyer opportunity. There are a lot of people that are saying, “I’ve got customers that have 2.5% mortgages on their homes. They’re not going anywhere. I have a thesis on that but give me your take on the first-time home buyer opportunity.
From a first-time home buyer standpoint, it’s massive. What a lot of lenders have not done so successfully is making sure that they’re understanding how to reach those Gen Z-ers because they’re on different channels. They spend a lot of their time on social media outlets, getting their education and advice. They’re not in the places where more traditional lenders have existed. Looking at your strategy to engage those customers in the channels that they exist in is important. Also, leading with education and advice.
They need a whole different level of education and advice. Make sure that you’re looking at your touchpoints and your customer journeys, and understanding that you’re leading with education to engage them, and offer them the right solutions that meet their needs like rent versus buy scenarios. Also, showing them what their financial wellness and their wealth creation look like over a 5 to 10-year plan. It is pretty dramatic.
We were talking with a partner of ours about closing the gap to homeownership and how for large segments of the population in the US, even if it’s a little bit more expensive for them to get into a home monthly, the long-term financial health benefit there tends to be so much stronger. Some of the reasons why is the pressure these extended communities and families get on the primary earner. Whether it’s cousin Eddie that is struggling and I end up giving him a loan or what have you. You pay a little bit more for your house payment versus rent.
I hadn’t thought about this but it made sense to me. Why home ownership is so important? You think about segments of the population where it is the best place they can invest in in a lot of scenarios because they can’t just go spend it easily. They can’t put it in a Robinhood account and trade crypto and withdraw it. Friends and family that are in need, while I’m all about helping friends and family, you got to be financially secure first and that home is a great spot. I know you agree with that directionally.
Remember, you may be paying a little more for your home today, but it’s also a fixed debt in a lot of cases assuming you attach yourself to a fixed-rate mortgage. Whereas rents are going to continue to increase over time too. If you look at that over a 5 to 10 years span, you may be paying significantly more in your rent than the home you can purchase today.
All you got to do is look at the investments. Some of the big fund managers such as Blackstone have put into single-family rental properties as an asset class. These are some of the smartest people in the world. They rarely lose over the long run and they’re betting on that asset class. For a regular consumer to think, “I don’t know. Some people are telling me I should rent versus buy.” I’m like, “Really?” These guys are the smartest people in the world arguably when it comes to finance and they’re saying you should own. You got to look at and consider things like that.
Wrapping up the opportunity here, I want to get into one last little conversation about loyalty, relationship building, and this opportunity. James, I’m going to start with you. We talked a little bit about relationship pricing. What are some key things as an organization? If I’m meeting with my leadership team and I’m saying, “What should we be doing?” Where do you start? How would you prioritize things?
The first thing I would do is say, “Let’s slant towards or lean in toward action and execute on some of these things,” because we’ve been talking about these strategies for a long time now. I’m hoping that this situation and the market are going to be a good catalyst for a lot of financial institutions to start acting. The second is to build a differentiated deposit strategy that is focused on the younger demographics because we’ve been talking about the transfer of wealth for a long time. It’s here and a lot of institutions haven’t built that loyalty with those younger demographics.
Lean into financial wellness and that needs to be more than just a blog that you have out on your website. There needs to be actively engaged communication with financial wellness that’s meaningful to those individuals. It’s time to focus on being as efficient and effective as possible. Now is the time to double down and invest in the right places because the pendulum always swings back. Now is the time to do that. Make sure you have the best processes and technology implemented so that when the pendulum swings back, you’re able to handle the volume in the right way. It’s all about this action.
It’s moving quickly and fast. Analysis paralysis is the death of a lot of companies, practitioners, loan officers, and advisors that we work with over the years. You see these deep cyclical environments and this happens to be a pretty significant one. One of the things that we see that separates the big winners from arguably the losers is they don’t take as much action. They don’t adjust. They’re not on offense. You hit the nail on the head and I agree with you.
One of the things that separates the big winners from the losers is that the losers don't take as much action. Click To Tweet
I would say for your strategy for engaging first-time home buyers, Gen Z and Millennials make up the majority of that population. Look at your strategy for how your originators are engaging those demographics for sure. Also, look at your lead conversions and look at ways that you can measure lead conversions. Every deal matters right now. How do you make sure that you’re nurturing those prospects over the life of that need?
You can get sales cycles that still last significantly longer than ever. Buyers are struggling to find homes due to a lack of inventory and affordability. Making sure that you’re looking at that customer journey and engaging those customers over a lot longer cycle than you have before. Another one that everybody should be looking at is how you use data and intelligence to surface opportunities within your database.
I can guarantee you that if you’ve closed the transaction over the last twelve months, those will be ripe for a rate and term refinance, and will have significant cost reductions in the next 3 to 6 months. Making sure that you’re preparing for those opportunities now so that your entire sales force is ready to seize them because time is of all importance when you try to look at how to use data to surface opportunities and engage the customers at the right time.
Both of the comments that you guys have leads me to fully support our thesis on you have to be a data-driven organization. You have to lead with data intelligence and insights. You have to package that with the automation and enablement of your sales organization. It means you’re forcing processes down to make sure that they’re taking action on those insights. If I’ve got Bob here or Susie that is a first-time home buyer, I want to know if they’re in the market. I want to know their financial profile.
I want to be able to drive the touchpoints and the engagement. I want to do it at an enterprise level. It’s not enough, and we see this over and over again. We looked at a lot of data in the last few weeks. The organization simply says, “Here’s an Excel file of some opportunities based on our back-of-the-house data team. Go ahead and call on these.” You might as well throw that in the trash can. You have to automate the entire process, and it’s a leadership-driven initiative.
You can’t just put some things in place and expect your customer-facing teams to have the discipline. The organizations that are putting systems in place right now are honing their current tech stack and saying, “I’m going to be able to analyze my current base of customers, segment those customers, and then drive communication, engagement, and advice as the markets are moving.”
It plays into both sides like credit unions and independent banks. This is an awesome discussion, guys. I appreciate the conversation. There’s a lot going on and it’s equal parts terrifying and equal parts exciting, depending on how you look at it. We always say to never waste a crisis. Lean into the opportunity, have a growth mindset, and let’s go. 2023 is moving along. Thank you, guys.
- Dan Catinella – LinkedIn
- James White – Twitter
About James White
James White, general manager of banking, has over 25 years of experience helping modern depositories grow market share and drive profitability. James’ leadership experience spans strategic planning, product development and delivery, professional services, sales and marketing, and customer success. Having worked with some of the largest banks and credit unions in the world, James believes in the power of an empathetic bank or credit union to create customers for life.
About Dan Catinella
With 20 years of experience in mortgage technology, Dan Catinella is a seasoned technology executive focused on driving digital transformation through all channels of lending. In an ever-changing digital landscape, Dan keeps a constant pulse on the next innovation that could change the way business is conducted. As Chief Lending Officer for Total Expert, Catinella identifies and develops high-impact innovation strategies that align with the company’s business goals and growth priorities. He works with Total Expert’s customers to dig into the problems they’re looking to solve and aligns Total Expert’s innovation strategy with their business goals.