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> Our Thoughts on the Silicon Valley Bank and Signature Bank Closures

We'd like to share some initial thoughts about the closures of Silicon Valley Bank and Signature Bank by regulators. These events have caused considerable share price volatility, particularly among the regional banks. Investors are nervous, and some are experiencing flashbacks from the Global Financial Crisis in the late 2000s. During that period, contagion led to sharp value declines across a wide spectrum of assets. We do not see these recent events as a replay of the 2008 Global Financial Crisis. 

Risky Businesses with Unique and Concentrated Customers 
We do not hold stock in the banks that have failed. They had risky business models focused on unique and concentrated customer segments. Technology startups accounted for a high percentage of Silicon Valley Bank’s deposit base.  Signature Bank was heavily involved in cryptocurrencies. Both banks experienced rapid deposit growth during the liquidity-fueled upturn in speculative assets during pandemic. They invested these funds from deposits into long-term bonds when interest rates were very low. These bonds experienced significant losses when interest rates rose in 2022. Uninsured deposits (over the $250,000 limit for FDIC insurance) accounted for 85-90% of total deposits. With little insurance to protect them, depositors headed for the exits at the first sign of trouble.

Our Bank Holdings are Different from the Banks that Failed 
We have exposure to some regional bank stocks. These holdings are a modest part of the broadly diversified portfolios we manage. After last year’s decline in the bond market, they have varying degrees of unrealized losses in their securities portfolios like other banks. These unrealized losses are much less than those of Silicon Valley Bank relative to total capital. Unlike the banks that failed, our bank holdings have diversified funding sources. They also have a much higher percentage of insured accounts that have no reason to withdraw funds. These banks do not have meaningful exposure to troubled cryptocurrency businesses. Several are likely to gain market share in the months ahead. 

This is not a Replay of the 2008 Global Financial Crisis 
While these bank failures seem reminiscent of the Global Financial Crisis, this event is quite different. In 2008, banks failed because of bad loans and poor credit underwriting. The banks have been highly regulated since the Global Financial Crisis. Most are in much better shape today than they were then. The demise of Silicon Valley Bank was not caused by credit problems but rather a mismatch of asset and liability (i.e. deposit) maturities. Silicon Valley Bank held a lot of highly credit-worthy but long dated US Treasuries and Agency Mortgage-Backed Securities as assets. Long-term bonds declined significantly last year leaving the bank with unrealized losses. Left untouched, they would eventually have matured at full value. But when customers started to pull money from the bank, Silicon Valley Bank was forced to recognize losses on these bonds.  

Regulators Have Stepped in to Protect Depositors 
On Sunday, the Treasury, Federal Reserve and FDIC announced measures to strengthen confidence in the US banking system.  The FDIC will ensure that depositors at the two failed banks have access to both their insured and uninsured balances. The Federal Reserve announced it will create a Bank Term Funding Program (BTFP). This program allows banks to pledge US Treasuries and other high-quality securities as collateral – at par – for a loan of up to one year. It will ensure that all eligible banks can meet the needs of all their customers if they decide to withdraw money from their bank accounts. This is positive news that should help restore stability to the financial markets. If banks can meet the needs of their customers, they will not have to realize losses on their securities portfolios. These bonds will eventually mature at full value. 

Your Ledyard Team is Hard at Work 
Over the past several days our investment team has been working hard to review individual bank stock and bond holdings. We have also had conversations with the mangers of several funds to hear their views and understand their bank exposures. We are also monitoring the performance of our portfolios closely, as we do whenever we experience elevated market stress. Periods like this illustrate the importance of diversification.  While banks stocks have declined in value, other parts of portfolios are holding up much better. Bonds, for example, are rising and dampening portfolio volatility as they have in the past. That is certainly a welcome development after last year’s historic bond market decline! The fallout from these bank failures is still fluid. We will continue to monitor developments as they arise. 

During times of market turmoil, we are proud to work for a local community bank that is not engaged in volatile industries. As a community bank, we focus on helping businesses and individuals in our community - we manage risk every single day. Our business is diversified and stable, and as a result, we are well capitalized with a strong liquidity position. We do not engage in financing fintechs or with the cryptocurrency industry. Ledyard was recently ranked among the Top 200 publicly traded banks and thrifts under $2 billion in assets in the United States by American Banker Magazine for the eighth consecutive year. The rankings, based on three-year return on average equity, is a testament to the fact that our business model today is the same as the day our founders established us. 

We encourage you to contact your wealth management team if you have any questions about your portfolios. My contact information is listed below if you wish to reach out to me. 

Douglas B. Phillips, CFA 
Chief Investment Officer

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