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Watch Your Banking Issues

Once again we are facing a potential bank run with the New York Community Bank (NYCB) situation. With the lack of leadership at this bank and a dramatic increase in loan loss reserves investors are starting to question potential issues at all banks–that’s the way these things go–a whisper and spreading of rumors and pretty soon in the day and age where deposits can move with the click of a mouse a bank is in trouble. I haven’t followed the NYCB situation closely, but I don’t have to know every detail–you can see the smoke and guess there might be a fire. I don’t have a dog in this fight–I sold almost all smaller bank issues over the course of the last 6 months, but once again will watch and see if we see any bargains being created in the segment. Here is an article from last night from Bloomberg. Be cautious–these things can take many months to ‘play out’–jumping in to bargains too soon can be costly.

Did you notice the Jackson Financial 8% reset preferred (JXN-A) took a 50 cent tumble yesterday? I sure noticed it as I have a full position and it turned that account red yesterday–oh well nothing to be concerned with here–just a short term move.

The 10 year treasury is trading at 4.18% now–pretty much flat with yesterdays close and dead flat with the close last week. As has been true over the last few weeks–always waiting on data and/or news. Tomorrow Jay Powell testifies before congress and this is always a wild card event. A slip of the tongue can move markets–and in particular with congress folks that may well be pushing him for rate cuts.

I continue to do mostly nothing in the markets. My cash will be replenished in big way on Friday when quite a few CDs mature–there is no doubt now that I will ‘roll’ some of the proceeds into new 3 month issues as coupons remain in the 5.3% area. Even my Gabelli money market (GABXX) remains at 5.27%. Any preferreds or baby bonds I will be buying in the months ahead will likely be additions to current holdings–but not those that I have full or overweight positions in already. We’ll see–only God knows what situations may spring up in the days and weeks ahead.

14 thoughts on “Watch Your Banking Issues”

  1. So 1 to 10 pfd into common. The pfd should be where $35?

    Divide NW by total assets. Under 6, bad. Under 5 dangerous. Under 4, much less 3. Insolvent. I hope to God they make it. It would really help banking if they do save the pfd investors. But they have headwinds.

    WAIT…… CITADEL GOT IN. OMG THAT’S SUPER GOOD!!!!!!!!

  2. Funny, some defended Janet reno and the fdic against my criticism, when frc, si, sivb failed.

    What they done here is incredible. If you’re not the TBTF…..

    All they had to do was suspend NYC dividends and request they sell assets. WTF JUST HAPPENED

  3. JXN pulling back from a sky high valuation has to be expected. Backing and filling to around 26.5 might continue, might not. Many had the chance to buy at 24.50 or lower. 1 measure I focus on is current yield. 8 and 9 coupons feel comfortable don’t they? Well if they are at 27.5 the CY may be 5.50. Would you buy that? Probably no, so you have to ask yourself why should I hold that.

    ZIONO hit almost 27.5 and has pulled back to like 25.5. ‘Stinking at the Lincoln’. I mean LNC D has almost hit 28.

    I was working on a SCE position. Was up like two $335 dividends about to get a thirds $335. Or sell it and profit $1,950. LOL my friend wanted both!

    The regional are playing with fire. And I am but with my eyes wide open. NYCB has reiterated the unknowable risks. I can’t see how they can survive. And if/when they go the multiplier effect might whiplash thru many other names. TheTBTF are probably safe down thru STT PNC USB.

    1. If you Prefer on one SCE I bought 10/3 and sold 11/30 for a $1,750.00 gain but I have been holding a full position since 10/10/22 and it’s been nice seeing the $468.75 roll in. I don’t intend to sell that core position. If anything, I would buy more if it dropped.
      As for JXN pA I didn’t even collect a divy. I bought at 25.10 1/03 and sold at 27.21 on 1/30

      1. Some of jxn a weakness may be associated with it becoming a long term cap gain 3/7/24

  4. I only own preferred shares from JPM, BAC and UBS

    It will take over a generation for us to deleverage on the national / corporate and personal front but think about how much stronger we would be at the end of all this mess.

    Just for fun, I used the Microsoft Copilot AI with the input of
    “credit to the US economy is like water to the Roman aqueducts”
    and this is what it returned …

    **Certainly! Let’s explore the analogy between credit and water in the context of the US economy:

    Credit as Water:
    Flow of Resources: Just as water flowed through Roman aqueducts, credit flows through the veins of the US economy. It fuels growth, sustains businesses, and enables transactions.
    Essential for Life: Water was essential for ancient Rome’s survival; similarly, credit is vital for economic vitality. It supports investment, consumption, and innovation.
    Distribution Network: Aqueducts distributed water across vast distances; credit networks connect borrowers, lenders, and investors, ensuring liquidity and economic circulation.
    Remember, while water nourished Rome, credit nourishes the modern economy, shaping its landscape and sustaining prosperity. ***

  5. Dang it, I need a little more time, we’re not quite out one year on the last panic buys, have a lot of bank preferreds bough 3/13-3/20 of last year I’d like to take profits on but … the tax man. Actually do I get to sell them a day earlier since it’s a leap year this year and there’s an extra day?

  6. I still like a lot of the regionals.

    For instance, CFG-D might be called–we’ll know this week–and if so, you get an IRR of over 16% buying it today at par. If it’s not called, it will start floating at SOFR + 3.9%, or roughly 9.25% at current rates.

    BANC-F is yielding over 8.5%.

    The CUBIs are yielding over 10% as well.

    I don’t think the failure of NYCB, if it happens, will affect any of these three too much in the medium or long term. (Famous last words: of course everyone should do their own due diligence on the sector.)

  7. From MarketWatch:
    New York Community Bancorp may be able to raise capital to strengthen its balance sheet and cover potential loan losses by selling mortgage-servicing rights, analysts at KBW said on Tuesday.

    New York Community Bancorp’s stock NYCB, 10.44% was up by 10% Tuesday, after dropping 23% in the previous session.

    With it stock price tumbling in recent weeks and a portfolio of office properties and multifamily loans under stress, New York Community Bancorp NYCB, 10.44% potentially needs to raise more capital to meet regulatory balance sheet requirements for banks with $100 billion or more of assets.

    KBW analysts Christopher McGratty, Bose George and Alexander Bond said in a late Monday research note that the bank could tap into its $78 billion in unpaid balances of mortgage-servicing rights to raise capital through a potential sale. The portfolio has a carrying value of $1.1 billion, analysts said.

    New York Community Bancorp’s stock was up by nearly 4% in premarket trading on Tuesday, after dropping 23% in the previous session.

    KBW analysts estimated that the sale of the mortgage-servicing rights could boost the bank’s common equity tier one (CET1) ratio by 10 to 15 basis points. The CET1 ratio is one key measure regulators use to weigh a bank’s liquidity and strength to face potential challenges.

    KBW lists potential buyers of the New York Community Bancorp’s Fannie Mae and Freddie Mac mortgage-servicing rights including Mr Cooper Group COOP, 1.39%, Rithm Capital Corp RITM, 0.56%, Annaly Capital Management Inc. NLY, 0.68%, Two Harbors Investment Corp. TWO, -0.17%, and funds that specialize in mortgage servicing rights.

    JPMorgan Chase & Co. JPM, 0.60% has also acquired mortgage-servicing rights in the past.

    The most likely buyers would be financial companies such as Annaly Capital Management and Two Harbors rather than operating companies, KBW said.

    This is because these deals would allow New York Community Bancorp to keep its escrow deposits if it continues as a mortgage subservicer.

    “As long as the company keeps the subservicing on any mortgage servicing rights sold, they should be able to maintain the deposits, especially since most buyers are non-banks,” KBW said. “However, if they sell the whole servicing operation, it will likely be harder to hold on to the escrow deposits.”

    New York Community Bancorp operates one of the largest mortgage subservicers in the U.S., with a portfolio of more than one million loans with unpaid balances of about $300 billion, KBW said.

    New York Community Bancorp, which is parent to operating unit Flagstar, said in late January that it needed to cut its dividend to raise more capital as a Category IV bank with assets of $100 billion to $250 billion, after its acquisition of Signature Bank last year.

    Since then, the bank has faced more bad news including the disclosure last week that it faced “material weaknesses” in its accounting protocols and news it would delay its financial filings.

    New York Community Bancorp’s stock has fallen 73% so far this year, including the 23% drop on Monday.

  8. Westie, good summary of the risk scenario for conservative long term investors. IMHO these bank crises have binary* outcomes and are best left to the more agile day traders. (After those ratings drops, I would guesstimate NYCB’s chances of toppling over are 50-50. Embarrassing for the regulators who used NYCB to solve the last banking crisis.) The Fed’s program propping up banks devalued bond portfolios will end in a week, kinda.** This should add another interesting wrinkle to things.

    **kinda – the Fed says the “end” of the BFTP program means — no new applications for new money advances are permitted after March 11 — which suggests that existing borrowings may continue. (The Fed is cute here by not disclosing a hard end date for the Program.) The BFTP program has been popular lately, not because more banks are in trouble but because some have found they can game the system for EZ money by doing interest rate arbitrage. Wolf Street covered this in a January 24, 2024 blog post

    *Footnote: The 0 in the binary trade, right here. When someone screams “Fire” in a crowded theater, I stay to watch how the movie ends.

  9. I own one regional bank preferred, CUBI-E, which I bought early last year anticipating it would be called in a quarter or two. Well, I am still waiting! On the bright side it’s price has held right around where I bought it, par, and it has paid a very juicy dividend of almost 11%! CUBI common stock has also shown no signs of panic as the price has held pretty up well too. However, this could change in a day and be gone Monday morning! Let’s hope not. I have thought multiple times about selling this issue and walk away with my 10 or 11% yield for the last year……. It was not bought with a long term hold in mind. Kind of wish it would be called and settle the issue.

    1. The behavior of the CUBI preferreds does seem to be an anomaly. The vast majority of the FF issuers seem to be reverting to their historical practice of refinancing these issues when they start floating.

  10. No smaller bank exposure here unless you consider the LNC preferreds and a Truist bond.

  11. Ah yes, regional banks… that unique opportunity to watch the common get pounded on Friday, watch the bank run on Saturday and hear rumors of a Zoom meeting with JPM and the FDIC on Sunday. Sunday (right before Asia opens) evening the announcement that all common, prefs and unsecured debt gets zeroed out while JPM makes huge profits. Then the inevitable Fed program which amounts to issuing more FHLB Notes to “fix” other banks.

    The regional bank situation reminds me very much of the so-called “cockroach theory” of investing. When companies (or industries) start having problems there are always more problems. There is always another cockroach:

    https://www.investopedia.com/terms/c/cockroach-theory.asp#:~:text=The%20cockroach%20theory%20refers%20to,some%20other%20unexpected%2C%20negative%20event.

    I;ll pass on the regional banks – I’ll buy the FHLB Notes (never above par…)

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