Not Your Grandfather’s Variety: With Myriad Causes, There’s Much to Learn From Recent Bank Failures

By Michael Collins

Seemingly out of nowhere, the failure of Silicon Valley Bank (SVB) became the second largest in U.S. history, nearly equaling the largest U.S. bank failure during the 2008 financial crisis. When that failure was followed by the demise of Signature Bank and Silvergate Capital, anyone could reasonably have had that “oh, no” moment and wondered whether or not it will lead to more failures.

While, at press time at least, we are confident that a bank failure contagion will not take place, there are some great lessons that door and window manufacturers can take from these recent events in girding their own businesses against future economic pitfalls. SVB, Signature Bank and Silvergate fell victim to the prior success of the market niches to which they catered. SVB had attracted billions in deposits from venture capital-backed start-up companies. These savvy investors chase the highest possible returns on their idle cash. To provide those returns, SVB invested huge portions of its available cash in the longest-term government debt securities available. Such securities provide the high interest rates in the near-term. However, when interest rates increase sharply (as they have), a longer span to maturity acts as a gigantic downward lever on the current value of assets. Add to that problem a fire sale of financial assets at a huge loss, senior managers selling their personal holdings in banks, a failed capital raise and nervous customers pulling billions from their deposits in a few days, and failure became almost certain.

Despite the Circumstances

The good news is that, by press time, mortgage lending has continued in a business-as-usual fashion in the wake of these bank failures. Industry observers have recommended that lenders who rely on a warehouse line of credit provided by a larger funding source have honest and frank conversations with them about funding availability. Such groups need to compare capital availability and map out any potential bumps in the road. Door and window manufacturers should have the same conversations with their lenders and other capital providers. This is a conversation that can come from a position of strength. Have an initial discussion with your capital providers regarding a potential upcoming capital need. It doesn’t have to be a full, formal presentation of a capital need. Rather, it can be an early-stage drawing board discussion where a fenestration manufacturer is trying to gauge its lenders’ willingness to come along with them on the full capital project.

The other lesson of these recent bank failures is the danger of having too great a concentration on a niche set of customers. One of the challenges faced by door and window manufacturers in this regard is the lack of visibility that most manufacturers have down to the last mile with end customers. In addition to conversations with your capital providers, this is a great time to talk with your dealer and distributor customers about risks and concentrations that they perceive in their own businesses. By taking the time to build your visibility of the next stage of the customer chain, you can address risks that become apparent in your business. The risks you never assess are the ones with the greatest potential to harm your business in uncertain times.

Michael Collins is an investment banker and a partner in EquiNova Capital Partners. He specializes in mergers and acquisitions in the door and window industry.
mcollins@buildingia.com

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