Firsthand Research: We Know Our Banks
Firsthand Research: We Know Our Banks
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Due to recent news about the collapse of Silicon Valley Bank and Signature Bank, we want to give you comfort about Fenimore’s bank holdings. A hallmark of our investment process is to personally know what we own, and the banks in which we invest are no different.
Our research analysts meet with and know our banks’ management teams, tour their facilities, and have extensive experience in the industry. This gives us long-term confidence during short-term challenges.
While the circumstances that led to the demise of these two banks are somewhat complex, their foundations were built with “hot deposits” whereas Fenimore’s banks are standing on primarily “core deposits.”
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Andrew Boord
Portfolio Manager, FAM Small Cap Fund
Here is a basic summary and what it means to you:
- Transactional Business Model: Silicon Valley Bank, for example, relied on a multitude of deposits from venture capital funded companies. These are typically very large deposits that far exceed the $250,000 FDIC insurance limit. These hot deposits can leave quickly — and they did. Then, apparently, many depositors panicked and withdrew their money causing a cascading effect.
It also appears that the bank did not have a solid risk management process in place. When the hot deposits left, they had to sell their large amount of bonds at big losses to meet deposit outflows and this burned up some of their capital — it spiraled downward from there.
- Relational Business Model: Fenimore’s regional banks are in the relationship business. They receive deposits from the community primarily for consumer checking accounts, business accounts, and savings accounts. These banks then loan most of that money back into the same community. They keep a modest amount of the deposits in bonds to earn some money, yet diversify their risk intelligently in our opinion.
By design, our banks rely almost entirely on core deposits that tend to be a vast collection of depositors with modest balances, so they are not dependent on a few customers or one industry of customers.
- Five Bank Holdings: While the banking industry has been facing various headwinds, we do not foresee a run on any of our banks. Additionally, across all portfolios and among our many holdings, Fenimore only owns stock in five banks as of 12/31/2022 — our exposure is limited.
The federal government has stepped in and declared that all Silicon Valley Bank and Signature Bank depositors will have access to all of their money immediately. The Federal Reserve also created a new program that will lend money to banks for up to one year. It’s probable that the government could continue to intervene, as necessary, to calm any fears.
Finally, as we’ve stated in several recent communications, Fenimore believes that we have a collection of quality investments that are positioned well for the long term.
We hope these insights are helpful. Please do not hesitate to contact us at 800.721.5391 with any questions.
