What Happened & How is Commercial Bank of California’s Approach Different

Dear Clients and Partners,

We know there is uncertainty in the market, and understand you may have questions and well-warranted concerns following the news about Silicon Valley Bank and Signature Bank. We want to offer clarity and share our industry insight into the main reasons these banks failed. Also, we will address our own business practices that will help us avoid the same outcome.

Before I discuss this, I want to offer some information that may help restore your confidence in the banking system as a whole. Late Sunday, March 12, 2023, news broke that the Federal Reserve Board launched the Bank Term Funding Program (BTFP). This offers loans of up to one year in length to eligible depository institutions like Commercial Bank of California pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The key news from this is that these assets will be valued at 100% of par value – something that’s never been done before to help the banks. This action and others as part of the BTFP will reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers, and the broader economy. As of today, we are participating in this program.

Next, I want I share the reasons why Silicon Valley Bank failed. There were multiple factors that led to the collapse including:

• The majority of SVB’s client base was in the tech and venture capital / private equity industries – and we know tech has had a few rough quarters.
• SVB grew significantly when the tech industry did.  It received the cash faster than it could lend, so it poured large amounts of the deposits into U.S. Treasuries and other government-sponsored debt securities.
• The rising cost to borrow money made it challenging for SVB’s core customer base of startups to get fresh funding – thus causing them to be more cash needy than in more prosperous times.
• SVB’s deposits fell more than it expected as startups drained their deposits to fund their daily operations. The value of the bonds SVB had purchased when money was cheap also significantly declined. To shore up the liquidity shortfall, SVB was forced to sell the bonds at a loss.
• SVB also attempted to secure capital but was unable to do so. Part of the lack of willingness to invest came after Moody’s degraded SVB’s ratings that changed after the sale of the bonds.
• And lastly, one private equity firm lost trust and confidence in the bank, so they asked hundreds of portfolio companies to pull their money out of SVB and that caused a ripple effect.

The above circumstances paired with the rapid depositor withdrawal of funds is what led to the intervention by the banking regulators to seize control of the bank and place it into receivership last Friday, March 10, 2023.

Separately, Signature Bank failed primarily because of their exposure to cryptocurrency volatility.

• Signature was one of the few banks to allow the deposit of cryptocurrency – and the collapse of FTX caused major volatility in the bank.
• Silvergate Bank, another cryptocurrency friendly bank announced on March 8, 2023, that they would be winding down operations voluntarily.

The Silvergate news coupled with regulators seizure of Silicon Valley Bank caused panic in Signature Bank’s client base. Signature clients quickly withdrew their funds causing a run on deposits necessitating the regulators step in and seize control of the bank on Sunday, March 14, 2023.

In contrast, I want to emphasize Commercial Bank of California’s foundational focus and how we are doing things differently.

Here are some key financial points that give us more stability and predictability:

• We have no exposure to crypto related deposits or loans.
• We also have no exposure to venture capital portfolio companies or start-up technology clients.
• We have more than $700 million in borrowing capacity with Federal banking systems.
• We have more than $100 million in unpledged marketable securities (classified as available for sale securities) that can be liquidated for any significant liquidity shortfall.
• We are well capitalized more than regulatory limits with a leverage ratio of 8.4% and a total risk-based capital ratio of 11.6%.
• We have diversified fixed income investments with moderate duration and interest rate sensitivity.

Furthermore, we have this stability and predictability because of our innate identity as a business. Everything we do is filtered through the lens of a private bank who puts clients’ needs at the forefront of our decision making. This means:

• As a private bank, we don’t have investor pressures like most banks have. Being private allows us the flexibility to make decisions in the best interest of our clients, our team, and the market dynamics.
• As a private bank, we are shielded from the exposure of the less predictable public markets and purposefully closely manage our own investment risk to protect the bank, the local community, our team, and our clients. We can achieve this because our investment portfolio is well diversified with a focus on steady cash flow generation and a low-to-moderate exposure to interest rate risks.
• We have a vastly diversified client base from both a deposits and a lending standpoint. Our clients are rooted in time-tested industries that are less impacted by short-term market volatility, and each of our clients is thriving in the strong, business-friendly environment in which we all operate.
• We have a Board of Directors comprised of people who are deeply rooted in the local business community and who greatly impact the Southern California local economy. Because of this, they are dedicated to making sure the bank also makes a positive impact in the community – and our business decisions are filtered through that approach.

What all of that means is that we’re unlike any bank out there. We have purposefully taken the partnership approach in working with each of you to make your goals, our goals. Our private status makes this possible and that status will remain intact – it allows us to be driven by our collective purpose, not just turning a profit.

When our financial decisions are based on your business growth, we can build a stronger partnership and stable growth trajectory. For the last 20 years, we have been focused on being a purposeful partner while finding new innovations and programs that help businesses grow. We have an incredible team that is dedicated to our collective success.

I hope this helped restore your confidence in the banking industry as a whole and I hope my transparency helped you better understand the different dynamics at play here with the banks that failed and separately with our bank.

Please know we will keep you apprised of new developments and other updates as they relate to this situation. If you’re available Thursday morning, I’d like to invite you to join me on a Town Hall webinar where I will be talking through more of this in detail. It’s hosted by the Westside Council of Chambers of Commerce in Los Angeles, and everyone is welcome to join in. Please register on WC3’s website here.

And if you have any specific questions, please don’t hesitate to reach out to your CBC banker or me directly at apatel@cbcal.com or (714) 875-6907.

Talk soon,

Ash Patel
Chairman, CEO & President of Commercial Bank of California