Ben Mackovak is the Co-Founder of Strategic Value Bank Partners, an investment partnership specializing in community banks. Ben also sits on the board for several banks.
1/10/2024 | 1:03:42
It’s been a wild ride lately for the banks. 2023 was the biggest year ever for bank failures. There are concerns about commercial real estate risk in the banking system, the Federal Reserve has raised interest rates at an incredible pace, and valuations for the entire sector are at a steep discount to the market. So, we had Ben join us to talk about all of this and share if these concerns are justified or if there is still opportunity in the space. Comments or suggestions? Interested in sponsoring an episode? Email us Feedback@TheMebFaberShow.com Links from the Episode: 1:22 – Welcome Ben to the show 2:08 – Overview of Strategic Value Bank Partners back in 2015 5:40 – Distinguishing between community and regional banks 7:42 – Discussing bank failures and reforms 28:49 – The state of banks today 33:13 – Banks exposure to commercial real estate risk 35:58 – Engaging with banks 40:13 – The impact of fintech 49:35 – Revealing Ben’s most controversial viewpoint 54:02 – Ben’s most memorable investment Learn more about Ben: Strategic Value Bank Partners
Meb: Ben, welcome to show
Ben: Meb, I love the intro music. Thanks for having me.
Meb: Man, it’s been, what, almost a decade now. I feel like we should change it at some point. And the biggest complaint we get is, “It’s too loud.” I said, “Good, it’ll wake you up, get you pumped up, ready to go talk about banks.” Where do we find you today?
Ben: I’m on the North Coast. I’m in Cleveland at our office.
Meb: Nice. We are going to do a super deep dive into all things banks today, which is a topic that was like forefront of the news. The news cycle is so short now, it was like the most intense story of 2023, but faded away after a couple of months. You guys have been around since 2015. Tell us a little bit about that period.
Ben: It seems whenever I try to go out of town, something happens. And so in hindsight, I probably could have predicted all this when I booked my trip to be out of town. So that week you had the Silvergate failure, which happened a few days prior. And that’s an odd little crypto bank, okay, that’s not really a big deal. But then you started to see real extreme volatility in the public market. And so I was at a Hilton hotel in Orange County when all this stuff started unwinding. We had a big private investment, the biggest investment we’d ever made, that we were exiting it and it was supposed to close on that Friday. So Silicon Valley Bank fails and we’re waiting for like a $100 million wire to come in and it turns out that the wire was supposed to go through Signature Bank. And with all the chaos that was going on, they didn’t send the wire. We’re like, “Oh crap, is this still going to… Are we going to have problems here? Is this really going to close?” So March 10th is the Friday, that’s Silicon Valley fails.
Meb: By the way, I get nervous when I send a $200 wire, I mean a $100 million wire and it not arriving, was that a pretty pucker moment for you? I mean was this a real stressor? Were you able to get people on the phone?
Ben: It was absolutely a stressor, yeah. Our operations people were trying to track it down and we were talking to the buyer and trying to figure out, “All right, what’s happening?” And they said, “Okay, we can’t send it today. We’re going to pick a different bank. We’re going to route it through First Republic.” That was the backup plan. Friday, Silicon Valley fails. And what people sometimes forget is that the stock closed at $100 the day before. So a lot of times when a stock goes to zero, you have sometimes years to sort of see the problems brewing and if you have a stop-loss or whatever, manage the risk of that. But when a bank is taken overnight, it’s hugely destabilizing because the stock price went from 100 to 0 literally before the market opened. And that freaks people out obviously. And what that does is it makes it harder for equity capital to go into the banking system. And at this point there’s real concern about a contagion. Are we having 1930 style bank runs? Is this going to be a systemic thing? Because at this point you’ve had three banks fail, but they’re all odd banks. They’re all kind of doing weird things with weird balance sheets. Silvergate was a crypto bank, Signature was a crypto bank, Silicon Valley, who was kind of a bizarre non-traditional bank. And so at the time, I was serving on five bank boards for different community banks across the country and called five emergency ALCO, asset-liability committee, meetings for that day. And an all hands on deck, “What are we seeing boots on the ground? Are we positioned for this? Do we have enough liquidity?” And what became evident is that these bank runs really were not impacting the smaller banks. They were impacting this handful of kind of odd banks that had either concentrated deposits or kind of nichey type business models, and then they were impacting some of the regional banks that were typically catering towards larger business customers. But they really weren’t impacting the smaller community banks.
Meb: Can you explain the difference for the listeners of when you say community and regional, what are the differentiators? Is it just size of assets? Is it focused on what they do?
Ben: Typically size of assets. I’d put them into three buckets. You’ve got the big money center banks, the too big to fail banks, and that’s Chase and B of A and Wells Fargo. And then you have the next level that I was on CNBC last year when this was going on, I called them the maybe too big to fail banks. These are the large regional banks that are really, really important parts of the economy. And so in that category, I’d put US Bank, Regions Bank, Fifth Third, Zion Bank, KeyBank. So these are massive banks, but it’s not quite clear if they’re too big to fail or not. Typically, if you’re big enough to do business with that kind of bank, then you’re big enough to do business with the money center bank. And so people during this time were saying, “No, to hell with it, I’m not going to take the risk that there’s some problem, I’m just going to move my money over to too big to fail bank.” And so it did create deposit outflows in those banks. I think this is probably a larger problem in terms of what I view as a two-tiered banking system in this country where you have too big to fail and then everybody else and it’s created an uneven playing field, which in normal times isn’t a big deal, but in times of stress and panic, it really is a big deal because the money flows to these too big to fail banks and comes out of the community banks and the regional banks.
Meb: Let’s stick on this topic for a second because there’s a lot of misinformation. Some of my VC buddies who’ve been on the podcast as alums were losing their mind on Twitter that weekend, probably not helping things. But you mentioned FDIC and the process, which is a process that has been very well established over the years. Bank failures are not something that is totally uncommon. It happens. Talk a little bit about the process, why people were going nutty and then also you mentioned reform. What are any ideas on how to make this better if it needs performing?
Ben: So something that I think people might find surprising is in 2023 there were four bank failures. There was one small one, but it was kind of fraud related in the summer, but there were four…
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