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Quiet Day Unless You Look at Regional/Community Banks

All in all equity markets are pretty quiet with the S&P500 up about 1/3rd%.

On the other hand the regional and community banker preferred stocks are taking a spanking–in spite of their earnings reports being pretty darned good. I have small positions in a number of the small banks, but the positions are very small and I am waiting (and waiting) for those issues to find a bottom–and for some of the ‘fear’ to clear out from the First Republic (FRC) seizure and no telling how long that will take–a month or more almost for certain.

One of the smaller banks I really like is Merchants Bancorp (MBIN) which is a Indiana based banker with $14 billion in assets. Shareholders equity has continued to grow in recent quarters which is one item I like to see happen. Their lending is weighted toward multi-family–which up until recently seemed to be a safe haven, but we have seen foreclosures in that segment recently. Obviously best to wait for a bit. There are current yields in the 7.5% to 8.50% area available. Here is their latest earnings data.

All the bankers are here and it would be my recommendation to build a watch list–not for current use, but to watch in the months ahead. The current situation will pass – just may be a while.

27 thoughts on “Quiet Day Unless You Look at Regional/Community Banks”

  1. Crisis = Opportunity
    My firm the last 3 weeks were hired by 3 separate financial money managers to analyze large tranches of financial holdings and bond portfolios that are very sophisticated. This takes an incredible amount of time, collaboration and effort to comprehend because many of these assets are hedged or have interest rate derivatives associated with these intricate portfolios.
    I will share with you what I have been tell their management teams; “I’d rather be a small winner than a big loser”, at this time. Do not let your winners reverses into losers (PERIOD). It is better to be out of the market wishing you were in then in the market wishing you were out. This is NOT a time for being a hero and taking undue risk/harm while the financial markets weakest holdings (Rome) burns🔥 Make good decisions because only you are responsible for your risk level, gains and losses…

    https://www.youtube.com/watch?v=V-OYKd8SVrI

    Wishing you all profitable investing, I am Azure

    1. Takes quite a few positions chasing a 2%-3% risk premium – and plenty of time – to make up for one 100% loss.

      1. And to top it off, I dont want to lose my double digit returns this year either, ha! But I just cant have everything in IBonds and 5% CDs because I would die of boredom, ha!
        One of only 2 bank preferreds I own and a few others may also is TFINP. This was a great couple buck share small ball trader for me a couple times, but this last foray Im sitting a bit in the hole on, but undeterred. Being trucking focused it is subject to different risks (think recession) than what “regionals” are facing.
        I liked this CC comment…….As you saw in the letter, we know we are willing to take revenue volatility. That is the risk we take. We try not to take credit risk, liquidity risk, interest rate risk. So if that’s the nature of your business, then this is the time in which you should not be making predictions.
        What I will predict is we are going to be profitable, no matter what happens because we’re so well positioned relative to any peers and because we have such a growth engine in TriumphPay ….
        SA must have been busy protecting Moron and for some reason didnt post TFIN conference call. For any who own this here is the link thanks to Reuters via Yahoo.
        https://finance.yahoo.com/news/q1-2023-triumph-financial-inc-055414722.html

        1. Grid, Yes I feel your pain. Could of told you freight movement is down. The shippers raised rates for the holiday season but they are down again. Amazon moved more freight on it’s own trucks and I expect with it’s sales volume down that it shipped less with other carriers, even USPS. As economy slows down more, freight will slow down. Fedex is holding to its strict rules of floor space and if I ship 3 units of 8ft or 10ft length I get charged for the full trailer. I can no longer rely on online quotes for those size shipments, I have to get a formal quote. The calls from brokers call centers has increased to the point I shut them down and hang up. Fedex is in belt tightening mode and we are shipping more with Old Dominion.

          1. Yes, Charles that was TFIN’s concern was trucking rates and volume are down. So this appears to be a more “traditional” economic risk this bank is facing. But actually I have been very pleased with this preferred as it has definitely made me small ball money this year. Sometimes the goofy thing will trade up or down 50-75 cents in one singular trade. I love small balling this thing. Maybe not so much if I own it and it drops to $15 though.

    2. Good morning Azure – are you seeing any higher yielding opportunites you like? Do you have any thoughts what so ever on $KEY? Your insight is appreciated as I am a new income investor

      1. sjc123, thank you for your question. I do not like the risk/reward spreads right now as I can get 5.25% on a 1 year CD, while the taxable bonds spread is not advantageous to the retail investor. I own a large amount of CMA and FITB corporate bonds, but those were bought with much higher yields. My other issue is that I have to be quite careful as I am doing paid analysis on larger bond portfolios and morally cannot buy into any of these financial companies. I have been looking at some of the common equity of utilities. They are the last real monopolies in the US and did buy some (D) Dominion Energy and (WTRG) Essential Utilities as I feel there is a decent low risk value in this sector. I will post if I buy more taxable or tax free bonds. I also have been investing in precious metals and trading Bitcoin. Be well my friend

    1. legends.vs — MBIN is the best I have seen. Heartland Financial (HTLF) had a decent report as well. I am most worried that if we hit the recession (whenever that might be) though we could see real issues everywhere.

      1. I looked through Merchant’s latest report and thought they did a good job of handling things. They seem to understand duration risk and, like me, they prefer the short end of the curve. Unlike FRC’s love for long, low interest rate jumbo mortgages, which fell in value as interest rates increased, Merchants seems to prefer monthly adjustable mortgages which reduce duration risk.

        They do pay high rates on their consumer MM accounts, which squeezes their profit margins. However, it does reduces the risk of capital flight to the popular and enticing US Govt MM funds. (Their total MM accounts actually increased Q2Q.) Borrowings are up bigly over the last quarter, but Merchants was proactive early in the crisis and issued ~$158M of bonds to shore up capital. (I’m not keen on their reliance on brokered CD’s, where most of their deposit growth was, though)

        They have a sweep program for those nervous about their deposits exceeding FDIC $250K limits. Also, they have a frog on their website. There are regional banks all over the place, but a good frog is hard to find. That clinched the deal for me. Long: Merchants. DYODD.

  2. The market might be wrong, but it is saying that Valley National (VLY) will be the next shoe to drop. The common is down -17%, the two preferreds (VLYPO,VLYPP) are down -13% to -15%. I show 145 bank preferreds of which 126 are down, 14 are up, and the remaining 5 are unchanged on the day. Median issue has lost -1.2% today. . .

    We do now own VLY/VLYPO/VLYPP in any account or have open buy/sell orders for them.

    1. Valley National has been an aggressive lender to commercial real estate in NYC, and people have become very nervous about the prospects for NYC commercial real estate. Valley also has/had strong institutional ownership; it could be that one of them got cold feet after seeing their first Q results. There also was a downgrade from strong buy to market performer from Raymond James, which may have caused a sell-off.

      I think any or all of that is enough to drop Valley National 15% in the current market environment.

      On the other hand, I don’t see VLY being “the next shoe to drop” if you are implying a bank run/insolvency, AKA bank #5 to be liquidated. Not saying it couldn’t happen, but I see no signs that it is more likely to happen at Valley than at any other mid-sized bank.

      1. Dono, it very well may be that VLY does not deserve to be the next shoe to drop. But if the market has other ideas, VlY and ANY non-TBTF bank can be forced into a bank run. All it takes is for a large chunk of depositors, even if they are insured, to start fleeing. Depositors do not care about the quality of a bank’s loan book. The book at FRC was ultra high quality, probably AAA to AA, and that did not make any difference.

        If the market decides it is time for VLY to go, you can order up the tombstone. And if a large short seller decided to help tip them over, it would be relatively easy to do.

        Once again, no positions and/or orders in VLY in any account, so we are unbiased in these observations.

        1. Tex, I bought one of VLY’s preferred 6 or so months back seeing how it was close to floating from looking over Tim’s list but then I saw an article in the news about how they had floated debt overseas in one country. Got me to thinking why would you do that when you’re a relatively small bank based in the US? Made me uneasy so I sold.

        2. The market doesn’t decide if VLY goes kaput. All they can do is crash the price on suspicion and fear. Other forces decide if they survive. Maybe the depositors and the regulators but not the investors so much they’re just predicting the future.

          1. Martin, I think it is a chicken and egg question. Yes, the market by itself cannot force a bank to go kaput. The question is whether a falling stock price can influence enough depositors to pull their money out? My premise is that they can and have done so at SIVB and FRC in particular. We all agree that banks work on a fractional reserve system. No bank, even the TBTF, could cash out 100% of their deposits on short order. And it makes no difference whether they are the insured or the uninsured portion. The question for each bank is how much of a deposit outflow they could sustain before it turns fatal? Recall that FRC reported positive earnings 6 days ago on 4/24 and know they are kaput. The downfalls can be steep.

            My concern regarding VLY is that common and preferred holders keep dropping the price. It creates smoke. Whether there is fire there or not is immaterial. If is whether depositors THINK there is a fire there. If enough depositors believe it, then VLY would be toast.

            I urge any III’ers that have high conviction to back up the truck and load it full of VLYPO and VLYPP. Personally I do not have that conviction but might be missing a great opportunity. Would not be the first time. . .

            We hold significant quantities of $1k bonds for several regional banks, particularly the Comerica July 23 ones. We do not own any bonds of the banks that showed up on the biggest loser list I posted a few days ago in the Sandbox.

      2. VLY is actually one of the least susceptible banks to a bank run. They have very limited HTM securities and have small AOCI losses. The main risk is there outsized CRE exposure although office exposure is pretty modest and almost no Manhattan office. Stock actually reacted quite favorably to their earnings report for two days until today’s downgrade to market perform.

        1. yeah – lots of Nervous Nellies out there overreacting to one broker downgrading them to . . . . Market Perform

          Many of these bank stocks are now trading based on irrational fear. Yeah, in the right situation, the fear could spark a run on any bank (and JPM will be there to steal more assets on the cheap) but I agree, VLY is one of the least susceptible banks to a bank run.

  3. Tim
    Just as the term regional suggests, the situation with loans, be they CRE, single family or multi family like apts. and condo’s is going to vary region to region. My region I don’t have proof but feel from seeing the amount of construction that multi family is getting over built. Also with the cost of real estate I have been reading there are more adjustable rate loans being used which could be a problem if in a recession jobs are lost and rates stay higher for longer.

    1. Let me be clear. Investors are spooked by the bogey man with the failure of FRC.
      I am not implying more failures of regional banks but as an investor I could be worried they suspend dividends of their common and preferred.

      1. You would hope some of the ones that could be in trouble but not flaming trash heaps would voluntarily liquidate while they are ahead.

        1. Charles, Legend – I think that in the current frenzy, if a bank were to suspend a dividend or to do anything that might be seen as a sign of weakness, the panicky mob will turn on them and they will be the next to fail. Crazy how the media/social media is feeding this banking problem.

          Only real strategy for a regional bank
          tinyurl.com/342a6cau

    2. Charles–anecdotally it seems like the MPLS/St Paul area is seeing a lot of apartment activity, but they claim it is needed.

      1. If your not familiar with ABAG (association of bay area government authority) I suggest you look it up. They are a coalition of local city and counties that are planning for future growth and telling cities and towns they need to build housing to meet demand. I am not saying we don’t need housing but things can change quickly in any economy and demanding growth with the threat of lawsuits doesn’t make sense.

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