April 2023
Jeff says Silicon Valley Bank collapsed due to their investments in longer bonds, so when depositors started to leave the bank, SVB did not have much liquidity because they could not sell those long-term bonds. This is a learning lesson for anyone who has money in a bank- it is imperative to ensure your bank prioritizes risk management. Jeff says while your banker should understand your balance sheet, you should also be asking questions about theirs. You should have conversations with your banker about their loan portfolio, bond strategy, and senior management.
Jeff also notes that American Business Bank evaluates their clients’ character, management, strategy during the pandemic, etc. Therefore, the clients they take on are generally quality companies who make money and preserve their assets. Your bank should be asking questions about how your business is run and how your organization has weathered storms in the past, as this may mean they are a bank that understands risk. Jeff recommends business owners to analyze the cash flow and debt structure they need to transform their lifestyle business into an organization that is not entirely dependent on them. Your bank should be helping you understand how to get there. Furthermore, business owners should understand how FDIC Insurance works in order to understand what risk they are taking. Jeff is confident that while some banks have failed recently, reinforcing the importance of being with a bank that mitigates risk, the banking system is here to stay through good and bad times.
Check out American Business Bank here: https://www.americanbb.bank/
Check out previous episodes of The Ripcord Moment:
Female Business Owners & Democratizing Insurance (Ep. 22)
Create Psychological Safety Before Selling Your Business (Ep. 21)
Welcome to The Ripcord Moment. I'm your host Joe Seetoo. Today, we're joined by my friend Jeff Monson, who has over 26 years in the banking industry. He's with American Business Bank that's located here in Los Angeles. They're a $4 billion bank, and he currently serves as their executive vice president in the San Fernando Valley there, which he's been doing for the last four years.
And we're happy to announce that, I guess effective in May at the end of May here, he'll become the chief credit officer. Jeff has previously served as senior vice president at California United Bank and also vice president at Union U.S. Bank. So, Jeff, with what's going on in the banking world, I thought it was timely that we sit down and hear directly from you.
Thank you, Joe. Thanks for having me.
It's been an exciting couple of weeks in banking for you, right?
Exciting to say the least.
So we got to start with Silicon Valley Bank. Talk to us a little bit about how this occurred and why the collapse was so fast.
Sure. Well, banking should be a very simple business. We make money by borrowing short term and lending long term. And hopefully we make a couple of points each time we do it. That's the model. The federal response to the 2020 pandemic was to pump literally trillions of dollars into the system in liquidity. And so a lot of banks were sitting there with this huge amount of liquidity, burning a hole in their proverbial pocket.
And so what do you do with the money? Well, some banks broadened the lending processes. Some went into new industries, including crypto and other dangerous industries. And some banks just looked at their bond portfolio differently. What Silicon Valley did was they tried to improve their yield by taking longer and longer bonds and that so increasing their duration risk.
Yes, exactly.
The longer maturing bonds.
Trying to keep up that yield, which was all fine and good. However, their short term depositors didn't have any commitment. They could leave whenever they wanted to. As I'm sure you know, the private equity market, which was a big part of their business model, shifted, as did their investment companies. And so when deposits started to leave the bank, they didn't have the liquidity because they couldn't sell those long term bonds.
Bonds, I think we all agree a U.S. T-bill that has no principal risk. But when the bond market jumps in the rate so fast, the ability to sell a three year old bond that yields one and a half percent is pretty hard when you can buy a brand new one at 4.5%.
Sure. Yeah. No. And they had a shift. Obviously, a lot of it's from their ready to sell portfolio to held at maturity.
Exactly.
And then they had the collapse and run on the bank. So let's talk a little bit about why is this different than in 2008 and maybe in some respects it's the same. What does that look like from your perspective, having lived through and worked through both of these environments.
2008 was really a crisis in credit. Banks had made loans to borrowers who could not repay those loans. And we can get into the mechanics of mortgage backed securities and and taking them into derivatives. But the long story short, there were bad loans being made by banks, non-banks, the lending.
Let me just pause. What do you think it was about that environment that I mean, but, you know, we're going to make a loan and there's a chance we're not going to get a pay back. But yet there was excessive risk taking. What causes that to just keep occurring at these institutions?
Well, I think that in my in my opinion, if you're doing it right, banking should be a single, maybe a double business. If you're aiming for a home run, you're inherently not a banker. Right? Right. And so in 2006, our bank was doing owner occupied deals at loan to value of 60 and 65%. Our competitors were doing 85%.
Two years later, when the market's down and banks stop lending, we're still doing 60, 65% loan to value or occupied deals before, you know, two years ago we were doing the same deal. We're doing same deal now. We sort of specialize in sticking to what we do. It's really easy, especially if you're trying to manage to Wall Street quarterly expectations to stretch to to say this time it's different. And it almost never it never is.
So we've classified 2008 as more of a credit crisis. How would you classify what has been going on in 2023?
I would say it's a liquidity crisis. I mean, we are we are dealing right now our competition on the deposit side is T-bills, right? We have clients calling us, and it's true now was also true two months ago saying, hey, you're paying me 2% of money market. I can get 30 day T-bills, which we all agree has less risk. Sure. Even if the banks were stronger. So, yeah, there's still even less for four and a half. Why wouldn't I do that? And the honest answer is, if you don't need that money, it's something you should consider. Sure. And we told our clients that. Yeah, if you. That happens enough times though, you have to think about liquidity.
We are fortunately a very liquid bank and we really watch that sort of thing. But money can flow out in a hurry. Compounded by the fact that both Signature Bank and Silicon Valley Bank had technology that allowed money to move 24 hours a day, seven days a week. Really, really fast. Mm hmm.
So this is an instance where technology almost where it was working against them.
Yeah. Yeah. And I think that there has to be just a risk acknowledgment to not just dollars and cents of credit risk, but also how fast things can change. We just live in a faster world.
So, you know, you bring up something interesting, which I think one of the reasons Silicon Valley Bank failed, they didn't have a chief risk officer for something like 12 or 18 months. I read or heard... let's pivot this back to business owners, which is your bread and butter. It's what we focus on here in terms of this podcast.
And so how should a business owner think about a chief risk officer and a bank and how while it only made not just in terms of their own loan and their own deposits, but in the broader scheme of the bank that they're using?
Well, in my opinion, every person who works for a bank is to some degree the chief risk officer. What do you mean by that? I mean that you are for a living, deciding if a, you know, 3%, 4% margin is worth what could go wrong for a real estate property for a business owner. So everybody needs to be thinking about risk all the time.
That includes liquidity risk, that includes enterprise risk. Our reputation is our single most valuable asset and that enterprise risk is is something that we look at every day. And I need every employee in our bank doing that. That's how we keep going. So the lack of that title. Mm hmm. Yes, that's important. But I think that the how one looks at every aspect of what you do in a bank should be at the end of the day thinking about risk.
So I think what I'm hearing you say here, Jeff, which will tie back to the owners, is they the owners, if they're when they're evaluating what bank they want to work with, they need to understand really the culture that permeates that bank. And it sounds like it's very strong in American Business Bank related to are they all looking... is everybody there taking sort of that onus, that leadership of risk management and it being first and foremost.
Your banker should understand your balance sheet. And frankly, you should be asking questions about theirs. Yeah, you want your banker to speak banker, but you also want your banker to understand the difference between entrepreneur and banker. Our founder, one of our founders, used the phrase consultants with capital when he's hiring a banker. He didn't want somebody who was thinking of themselves as a lender or as a deposit gatherer.
He wanted somebody who, first and foremost was a consultant with capital. And I would say that when we bring on a new customer to ABB, we have been their banker for years before because we've been the one they call for advice before their client. And so the transition from client for prospect to client is is pretty seamless. We take great pride and my job is to answer questions.
Yeah my, you know, we want to be the person when I go to a party and people ask me what I do for a living, I tell them, look, commercial banker, either they leave... They ask me questions about the economy, questions about, you know, currency risk. They ask me questions about what's going on in other countries because a banker should be. Yeah. One of those people who is talking about money in all aspects of money and the risk socially of money all the time.
Not just pushing product, but really has a deep knowledge about the financial markets, the credit markets, business, like you said, their true consultant. I love that. I want to pivot back to what we just said a few minutes ago about the business owners asking questions of their banker. So, you know, share with us a few of like, you know, because you might get the generic question.
Well, you know, how safe are you or your, you know, credit rating or this idea of like, what are some of the deeper questions that your business owner clients are asking you? So two of the things that I am most proud of about our bank is 25 years old next next month, and we have written off $450,000 in bad credit in that entire run rate. We which is a very small percentage. Very small. Yeah. We currently have two and a half billion in loans. We have lent 5 billion over that 25 years. Okay. We we make mistakes all the time. Sure. But we have a nice moat around those mistakes so we can catch up. We've never taken back a property in the history of the bank, never foreclosed in our property.
And you should be asking your bank about their loan portfolio, not your loan, but their portfolio. You should be asking them about their bond strategy. You should be asking them about what was it like for them in 2008? What did they do? Oh, we believe that if you're doing it right, you should be, you know, agnostic to the economy, you should be aware of it, but you should do what you do because hopefully your customers are smart and they can adjust.
So they should be asking about that. But also they should be talking about senior management. We believe that matter of fact, we have 2,000 clients bank wide. I bet 99% have met one of our five members of our team. And the other 1% who hasn't will in the next 90 days.
Because we're very relational. But you just want the perspective of what the bank is thinking. So, yes, your banker and you should meet. We should also meet the regional guy. You should get the people around because you want that cultural identification. And also just talk about, you know, what's happened, how you know, what's your safety and soundness. You can ask capital ratios and you can ask that stuff and maybe you understand it.
But it's most owners. I met, by the way, double right? So this is why I want to give you a specific question.
So what I think you really want to know about what happened in the bad times. Yeah, what the bank did and what the bank is doing in the last two weeks. How are you looking at things?
So speaking of which, the last two weeks, do you think, you know, talking about what the Fed has done, the Treasury, it does seem to be calming the markets. We've got this sort of idea that they're going to bail out depositors. Do you think they’ve gone far enough?
So, yes. So, I mean, my my the phone calls I got this week were not nearly as scary as last week and much better because your our our clients have calmed down. I think that the Treasury and the Fed basically stepped in and did two things. They they guaranteed the deposits for those two banks. And secondly, they gave the banks the ability to pull liquidity at par value of their bond books. Right. That should buy us some time. They should buy even the banks who might have pushed too far into the long category by some time. Do I think that the Congress has the appetite to make unlimited deposits insured? No, I don't. I don't think so. But I do think that when you look at the history of bank failures, the depositors have been taken care of largely by them, by the Fed and the Treasury.
And I, I think there is a if not a guarantee, there's an implicit confidence boost by the Fed and the Treasury.
Well, let's just stick on this for just a second. So you said something there that I want to just dig into. So maybe people have more of a technical understanding, right? Because the bond portfolio most banks have. Right. When interest rates go up, the current value is dropped. And then that is theoretically what was being used to access liquidity.
And what you're saying is that even if the current value is less than what the maturity value would be or the par value of those holdings, the Fed is actually allowed them to have that higher value to be able to borrow against.
Our bank has a portfolio of $1.4 billion, give or take, in primarily Treasuries and very safe, boring government backed investments that have lost value over the last because the market's changed so much. So we have on our books at 1241, we had $81 million non-cash loss on the bond portfolio, right? Sure. And selling those unless you really had to because you don't want to own for loss of course that right now we can borrow like that for the full value, right right.
Got it. And what you'll get when they mature.
Exactly exactly because we I think we all agree that our bonds when they do mature, will pay us 100% of the value. They are federally backed.
So let's talk a little bit about the composition of your client. So let's get into, you know, the kind of clients that you service, you know, who are good clients for your bank, who you like working with. Talk to us a little bit about who those are.
So we are the five C's of credit everyone talks about- the most important for us is character. We want good management. We're going to be asking you questions about what happened yesterday to your company. We're going to ask about good times and bad times, how you responded to the pandemic. We want management. Our companies. They make money. And that's one of the big differences with some of the banks who are in trouble right now.
They have a burn rate. Their companies are spending money because they're losing money. Yeah, our companies don't burn money. Yeah, they make money. Sure. The problem is and that's what we're, you know, ideal.
Right? It's a crazy idea. And, you know we want business owners. We don't do crypto, we don't do marijuana related businesses. But barring that, we just want the best 5% of the market. If you're the best contractor, we want to talk to you. Okay? If you're the best manufacturer of cosmetics, we want to talk to you. We, we, we like and we like old fashion manufacturers, wholesalers, distributors, contractors. We have a lot of law firms and CPA firms, just well run companies when the weather storms because they're going to weather the storm, too. Absolutely.
So in terms of the advice you would give to an owner in terms of sort of their call to action. Right. I call this The Ripcord Moment because I think business is, you know, better if they want to go from a lifestyle business to one that's transferable to the next generation. Other management partners, a third party sale, which you've done a lot of as well over the years.
Sure. What are the best companies doing from a business banking perspective that owners need to be thinking about to be in those top tier companies?
So I think that they are looking at their balance sheet, they're looking at their cash, they're looking at their ability to borrow, they're looking at their assets and they're asking themselves the question, are they able to get what they need to get with the balance sheet and if not, what they need to do to get there? Okay. So their banking relationship should be not a conduit to get you where you were, but where you're going.
So ask yourself to get you from this 70 hours a week, 80 hours a week lifestyle to one that you're either part time or out of entirely. What do you need to look like on a cash basis? A cash flow basis and a debt structure? And your bank should be helping you understand what exists out there to get there.
So on what exists today, I want to take just one step back in terms of like risk management. Right. So obviously, is there anything else besides the ICS programs that that are out there, the seeders programs that business owners should be doing just too if they have large amounts of cash at a bank to shore themselves up from a risk management standpoint.
So I think that I mean, for a company who's doing 30 million in revenue, you can't have 200,000, you know, your payables a million, of course. So you can't FDIC insure your entire life. So obviously, is your bank a bank who's in trouble? Right. Ask those questions. You should know the answer. Yeah. And maybe your banker doesn't know the answer, but their boss does.
Yeah. So? So find out. Find out what your bank is like, then find out their balance sheet. Someone drill down. If you have cash well in excess of what you need, then talk about that. There are options and maybe it's maybe some in treasuries is the answer or maybe you have the ability to do a money market account with a with an investment house.
There are there are safe investments that are either federally backed or FDIC back or something that you can do. So I think that you should be looking at how much cash do you have and how much cash do you need. I mean, I have companies who are doing 200 million in revenue. They have to have $20 million right now, not because they're crazy rich, but no, it's a 1 billion, right?
Yeah, sure. So you need to decide what you need to operate, you need to decide. And you should be talking to your banker about what options that they have. Okay. And yes, there is the ICS program, there is Federated and CRs and, and various programs that allow you to increase your FDIC insurance. But all of those come with operational challenges.
And I just know that that's great. Anything else in terms of pearls of wisdom you would share with business owners that they should just be thinking about doing as they're institutionalizing or just doing good, good business practices.
I think that you should watch the financial news networks with a suspicious eye.
I don't think it's dishonest, but I do think it's it's hyped. I really do think that the number of of of bank closures that we see on the horizon, I can't promise you it's none. But I do think that we are now realizing that banking is not going to stop on Wednesday. No, we're going to be around.
Yeah, for better or worse.
Exactly. So I would say that. And number two, I say that whatever your risk tolerance is of the bank, you should be thinking about your, sorry as a company. Yeah, you should be applying that risk tolerance to your bank. Yeah. Make sure there's alignment there. Yeah. Jeff, if anyone in the audience wanted to get a hold of you, how would they go about doing it?
So I am in the car a fair amount, as you can imagine. So my cell phone is the best way. I know this is dangerous, but I'm an 8182127652.
No prank calls.
My email address, if you want is JMunson@Americanbb.bank and I'm around and I meant what I said about consultants with capital. Yeah I want to educate the market and it doesn't necessarily mean you need to move to me. Yeah I want Southern California where I, where I live and work to to be a good place.
I love that about you, Jeff. You're always a wealth of knowledge. You're so generous in, you know, your idea sharing. And I really appreciate you taking the time here to come in and talk to us about banking especially during these turbulent times.
It's good to be here, Joe. Thanks for having me.
Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change or do not necessarily represent the views and opinions of Morton Wealth. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.
