Well not much market action today being Good Friday and for the most part markets are closed.
Employment numbers were released for March and I guess I view them as somewhat Goldilocks. 236,000 new jobs were created versus a 238,000 forecast and much slower than the previous month of 326,000. At the same time the unemployment rate fell to 3.5% down 1/10%. Wages were up .3% from a month ago, while up 4.2% year over year. It seems to me whether the Fed raises at the next meeting, which is May 2nd and 3rd, will be determined, in large part based on will be determined by 3 things–of which employment is one, consumer prices (CPI) is the second and personal consumption expenditures (PCE) is the 3rd.
As of this minute I think it is a coin toss as to whether they raise rates—too much data yet to be seen before a decision is made. Beyond ‘data’ we still have the banking event to deal with – and how much is this going to factor into decisions–and we will never know the answer to this because the Fed will want to show economic confidence–don’t think they are going to say ‘we need to pause because of the weak banking situation’. Well that decision is near a month away yet so lots of data to come before that time so we will have to take it one day at a time.
Well I am going to spend some time this weekend working on my portfolio – lay out what I own and what I want to own. I’ll post the info here – I hope tomorrow.
For Whatever It Is Worth, these are the Small Banks in my holdings
FHNPRD
JXNPRA
ASBA
CUBIPRF
FCNCO
HTLFP
MBINM
OZKAP
PACWP
NYCB
WAFDP
WSBCP
ZIONL
I like these with varying amounts of commitment
Some solid, others more speculative (OZKAP seems most vulnerable to market doubt)
The difficulty going forward is that much of the reward for taking risk may have been realized already.
No way of knowing if the market may gag again in the future.
The potential problem of depositor flight seems to have settled down, and is, I believe, minimal in the banks above.
But, in the future, runs may be driven by “negative equity” articles in the media. Negative equity being the result of subtracting the market value at present interest rates of a bank’s securities and loans from its book equity ending up a minus number. This is a challenging concert for both banks and insurance companies in a rising interest rate environment. As it is such a broad problem, caused by government actions (increasing interest rates), my personal view is the government will do whatever is necessary to prevent ramifications.
A final hurdle facing small banks is losses from a recession.
I’m acceptably comfortable these are slow boiling problems which can be dealt with by good management rather than another SVB or FRC . To me, the preferreds of the better banks are still good risk/reward bets.
As you could see in the earlier post, the total commitment to all these banks is < 5% of my portfolio. I am comfortable with where I am now but don't expect to add to the Small Bank category in the future.
BEWARE: First Republic Bank suspended dividends on all preferred Shares
it was obvious
sharing my small bank holdings CMA WAL CFG CPF EBC and cef FLC
realize cma cfg cpf not some folks definition of small
shopping for LNCpD JXNpA SYFpA
Reading your blogs are one of best things of my day. Very informative and simple to understand for young investors. Thank you Tim.
Tim,
Look forward to your list.
I did sell a few stocks in early Feb. to cash in on a few I thought might give up the gains , also to free up some money. I maybe should of sold partial positions in a few more but I kept most holdings trying to build up an income stream and less concerned about capturing growth. A few I sold out of full positions on I am actually looking at reentering as they held up fairly well.
As expected by many, FRC cuts it’s dividends on the 7 preferreds. As these are non-cumulative and already trading $5-6s (dividends of 17-21%) wonder how low they fall and if there is any contagion to other regionals on Monday.
EXCERPT:
The latest suspension of dividends relates to seven series of preferred stock. The bank said that the right of holders to receive dividends is “noncumulative,” meaning dividends don’t accrue to be paid at a later date should the bank resume payments.
First Republic disclosed the suspension of payments as it also announced that it plans to report its first-quarter results on April 24. By suspending dividend payments on the preferred stock, the bank will conserve capital.
The bank had $3.6 billion in preferred stock outstanding as of Dec. 31, 2022, according to its latest annual filing. In 2022, it paid $158 million in dividends on preferred stock, the filing shows.
mSquare thank you for the post. I hold no FRC or any of their preferred and had no interest in rushing to buy any after it looked like they would survive with Fed. intervention. I can see from the close on Thursday FRC was up. They waited until the market was closed to announce this so we can guess what might happen Monday. One, Investors see capitol preservation as good and the stock recovers after initially falling. Or Two, the short sellers have a party as everyone try’s to unload and squeeze out the door.
Also there is a possibility other bank preferred could fall Monday in sympathy.
The question then is which are the stronger ones that will bounce back after the panic?
I sheepishly admit, I have a few GUC orders out there. I will review them this weekend and may lower the bid price or even cancel.
Suggestions invited.
Would you all be kind enough to explain if FRC common dividend of .27 remains intact or that remains to be seen (ex-div 4-25)… assumed common div would also need to be suspended in order to suspend preferred dividend (in our case FRC-J ex 4-12)… dependent on charter, board, etc?
Does this vary from bank to bank, and would differ as well in all publicly traded companies?
My experience is cutting or suspending common prior to or with preferred. Understand bank prefs are non cumulative.
Any guess on JPM or GS acquisition of FRC? What will become of FRC, viewed as desirable high end clientele.
Thank you
FRC suspended its common dividend when it got the $30B infusion from the TBTFs last month. IMHO, takeover talk is speculative. Some say that the value of FRC may be negative because of unrealized losses on the assets on its books or the Feds would have already engineered a takeover. This may imply a piecemeal sell-off as reported by Reuters. FWIW: I don’t follow FRC. DYODD.
Reinforcing Confidence in First Republic Bank: $30 Billion in Uninsured Deposits Committed from America’s Largest Banks
SAN FRANCISCO, March 16, 2023
https://ir.firstrepublic.com/static-files/18c04dea-0d44-43ed-b420-b066d56e1f54
“The Bank is focused on reducing its borrowings and evaluating the composition and size of its balance sheet going forward. Consistent with this focus and during this period of recovery, the Bank’s Board of Directors has determined to suspend its common stock dividend.”
First Republic seeks new ways to escape unrealized losses
https://www.reuters.com/business/finance/first-republic-shares-steady-after-brutal-selloff-2023-03-21/
…the bank …(has a) negative book value – the gap between its liabilities and its assets – which analysts and investors estimate to be between $9.4 billion and $13.5 billion.”
Excellent clarification. Thank you BearNJ
Tim,
I agree, these are pretty great numbers. Put me in the “Fed holds rates here” camp, at least for now.
I’ve been a daily reader of this site for five months.
I really appreciate the effort, honesty, and insight that you all provide.
I’m a retired banker and have been building my retirement portfolio during those five months, with significant assistance from you all.
In light of Tim’s comment of analyzing his portfolio this weekend, I’ve done the same:
(% of Portfolio/# Holdings/ CDx3 ratings/Description)
15.4% BIL/SGOV Cash
47.3% T-Bills
4.9% 14 CDx3 8-10 Small Bank
4.1% 10 Too Big To F Large Bank
0.5% 2 CDx3 9 Holding Co
3.7% 7 CDx3 9-10 Ins
5.1% 8 CDx3 7-10 Fin Fund
2.0% 5 CDx3 8-10 REIT
3.9% 8 CDx3 9 Energy
2.3% 5 CDx3 8 Utility
0.7% 1 Co-Op
10.1% 11 Corp
Comments:
– As a former banker, I am, by nature, conservative (the high concentration of T-Bills/Cash) and more confident of the survival of the stronger small banks than the market.
– I believe that SPY faces a ceiling of 4200 with a floor somewhere in the low 3000’s over the coming year and a half and I have a current negative holding of equities (SH). Falling earnings, rotation out of equities into bonds, strong cutback in bank lending (see today’s report – greatest cutback in lending in past weeks since the 80’s), and unrealistic P/E multiples in higher interest rate environment are expected to bring equities down.
– I am relying on preferred dividends , T Bill and BIL/SGOV for income.
– I’m planning to invest in quality equities as opportunities develop if the stock market falls as I expect.
– CDx3 has been enormously valuable. There are holes in its data because of market moves, but overall I find it very valuable as a first step in evaluating risk.
– During the five months, my principal pratfall has been CORRPRA’s suspension of its dividend. After the subsequent optimistic management release, I have been a frequent buyer of the distressed shares and now have a substantial position. As it is a Cumulative stock, if/when dividends are restored, it has the possibility of being a big winner.
The above thoughts are offered in appreciation of all the quality information you all have shared.
By all means feel free to comment on what you think is good, where you disagree, and what you think I’ve missed.
It is the free discussion that I find most valuable.
Westie, thanks for sharing. Which small banks do you deem to be stronger? How did you determine that? Can you share their names?
My due diligence includes (among other) checking the following two sites but the data may be stale:
https://www.depositaccounts.com/banks/health.aspx
https://weissratings.com/en/banking
Side note: Bill S, thank you for the Weiss link.
Westie,
My only comment is to read Trapping Value’s articles over on Seeking Alpha and others. Over the years a lot of III’s here were in the CORR A
I was in it from the beginning when it was discussed that the founder of Tortoise funds had set up CORR I traded in and out of it from low 20’s to the high 30’s and finally lost interest in the low 30’s
Instead of growing the REIT as promised with one to two acquisitions a year, they were just flipping assets. Instead of diversifying they sold one of the first assets electric transmission lines and went full petro related assets.
The rule of trades only works if there is another who is willing to pay more for what you are holding. CORR bought stranded assets in Calif. thinking probably they were essential only to find out demand was declining and now if they can find a buyer it will probably be as a loss.
The only way for this REIT going forward is to raise capitol to start buying new assets and I don’t think the market is in the mood to loan money to a loser even with a well known asset manager.
I would think from a risk point of view, if the market hiccups again and bank stocks take another tumble, the reward might be to buy at more at the same or lower price point.
darn good summary Charles
Westie; thanks for sharing your list ; question with Prime MMFs like Schwab yielding 4.65% as we speak; why not simplify your holdings ? i have a cash reserve right now of 25% and its all in the Schwab muni mmf (swtxx) ; I view the risk as just about zero;