March 15, 2023
 
Dear Valued Customer,
 
The recent bank failures have generated concern and uncertainty in the US banking system. We wanted to send you a brief, high level explanation of the recent developments.
 
Silicon Valley Bank (SVB) is the first FDIC-insured institution to fail since 2020 and the largest by asset size (over $200 billion) since Washington Mutual failed in 2008. SVB’s failure was followed by the failure of crypto-focused Signature Bank in New York (assets over $100 billion). The news caused financial markets to speculate if there is another shoe to drop. For some, these developments brought back painful memories of the financial crisis 15 years ago.
 
In comparing this to the financial crisis of 2008, the problem back then was credit risk. A rapidly declining real estate market and associated mortgages created large credit losses. Credit risk is not the problem this time, it is interest rate risk. Rising interest rates caused the bonds on SVB’s balance sheet to lose value (the value of bonds move in the opposite direction of interest rates). Bonds typically provide liquidity to banks if deposits shrink or loans grow. When SVB’s deposits rapidly decreased, these bonds needed to be sold at a large loss to create liquidity, totally depleting the bank’s capital. This prompted the FDIC to place the bank in receivership. The FDIC has now stepped in and will cover all depositors regardless of size. The cost will be covered by all FDIC member banks through a special assessment.
 
The big problem at SVB was their niche customer base. The bank’s emphasis on early-stage, higher risk venture capital customers meant its deposit base was more concentrated to a single sector and less sticky than most banks. Many of those start-up companies burned through a lot of cash recently, while at the same time their funding options such as initial public offerings dried up. This caused SVB’s deposits to shrink very rapidly, even prior to the final “run on deposits”. This created the need to sell off a large portion of their bond portfolio at significant losses to cover shrinking deposits.
 
One other unique element of this story is SVB’s mismanagement of its balance sheet. Its heavy exposure to interest rate sensitive government securities, with insufficient interest rate hedging activities, left the bank particularly vulnerable to a run. Once the bank was known to be facing solvency issues, word traveled fast through the venture capital community and the deposits fled as fast as these entrepreneurs could log into their online accounts.
 
SVB’s higher risk, niche clientele and its balance sheet mismanagement were large contributors to the bank’s downfall. The business model and deposit profile of Frandsen Bank and Trust is entirely different from that of SVB or Signature Bank. Frandsen Bank & Trust has been built on stable core deposits from a diverse group of long-term business, agricultural, and retail customers. Our customers are nothing like those of SVB. Our deposits have remained very stable in every economic cycle. Frandsen Bank was chartered in 1901 and has remained well capitalized and rock solid through many economic cycles, including the great recession of 2008-2011. For this reason, we can confidently say your deposits of all sizes are safe at Frandsen Bank.
 
Thanks for your ongoing confidence in us. Please call your local banker with any further questions. 
 
 
Sincerely,

Charles A. Mausbach
Chief Executive Officer
Frandsen Financial Corporation