buy bank stocks on the dip

[chasesfish]

Anything we need to know about the end of the Fed Bank Term Funding Program?

IMO it is a non-event.   There's plenty of other sources available, both public and private.  (Fed window, FHLB, and brokered CD market)

[ChpBstrd]

Anything we need to know about the end of the Fed Bank Term Funding Program?

IMO it is a non-event.   There's plenty of other sources available, both public and private.  (Fed window, FHLB, and brokered CD market)

But I don't think any of these will take discounted treasuries as collateral at face value - so for banks with lots of older treasuries their borrowing capacity is lower than it was under the BTFP.

[chasesfish]

The point of BTFP was to allow banks a backstop for large deposit outflows and post treasuries as collateral instead of selling it at a loss.   This was mostly an issue for banks with high percentages of uninsured deposits with flight risks.  Those concentrations should have been replaced over the last year through various means, but mainly brokered CDs, time deposits, savings account promotions, all things within the existing FDIC Insurance limits. 

They can also still sell the collateral at a lower loss than a year ago.  The portfolios got a year of duration burnoff.  |

I could be wrong, but my opinion is this is a non-issue.

[chasesfish]

Another doom post based on a research firm's report plus CNBC

https://www.cnbc.com/2024/03/19/where-cracks-in-the-banking-sector-may-appear-without-more-ma.html

They report implies 300% or more in CRE to Tangible Common Equity is a problem and looks at those banks with 4% or less in Tangible Common Equity after bond marks.

The risks to investors in these banks is mostly a dilutive capital raise, which could be pushed by the regulators.  So far regulators and investors realize the bond marks recover with time and most lenders aren't seeing abnormal levels of distress.    Losses in treasuries are mathematical and known, making dilutive capital raises easier.  Losses in credit are the unknown and harder.

The one issue with the CRE concentration number is owner occupied real estate loans are lumped into the total CRE bucket.  Your local dentist's office or auto repair shop isn't the same risk as your merchant real estate developer. 

The conclusion of this is mostly known - there will still be some failures of banks that poorly managed their bond book and credit risk, and there will be dilutive capital raises or mergers for others.   I'm not seeing much new information here and the market isn't moving at all on it.

[Weathering]

Banks are doing well now that no one is trash-talking them in the news.
VLY and VLY-O are up this week.

[chasesfish]

Banks are doing well now that no one is trash-talking them in the news.
VLY and VLY-O are up this week.

My $BAC is is over $37, far cry from the $25 it was trading from back in October when a report would come out weekly with the "mark certain assets down" and call them insolvent.   

The banks seem to like the fed announcements, they're still planning on 2-3 cuts this year and some early next year even if the economy is running hot.   That likely flattens out the yield curve, keeps employment up, and accepts inflation running above 2% for longer.   Inflation sucks for a lot of things, but it doesn't suck for bank lending businesses. 

Next up is stock buyback and merger activity.   We still have a week to go and the 5yr moved against banks this quarter, but I think that's the last hit to bank capital / capital building and we'll see a higher percentage of earnings returned to shareholders going forward.

[ChpBstrd]

The following banks were just downgraded by S&P from stable to negative.

FCF
VLY
SNV
TRMK
MTB

To me this seems like a strange mix of possibly decent banks (MTB, FCF) and overextended turd banks (VLY, TRMK, SNV). What they have in common are significant loss provisions and CRE exposure. 

I call this a mix of decent banks and turds because their numbers are so different.

M&T for example has about the same 88% debt/assets ratio it had at the end of 2020, but since then has grown tangible book value +58%, diluted EPS +75.5%, and free cash flow +492%. Each metric has improved consistently year after year. Yet their stock has only risen +7.5% across these 13 quarters of rapid growth, and their PE ratio is less than 9.

Trustmark, on the other hand, has a 91% debt/assets ratio, has inconsistent EPS growth, free cash flow that has been falling since 2021, and roller-coaster tangible book value.

One of these things is not like the other, but S&P thinks a CRE crisis could be coming for them all. Perhaps their point is worth considering. Where can rapid growth come from in the saturated banking industry, if not from taking the risks other banks were smart enough to refuse? The banks we respect today could become the NYCBs of tomorrow.

Then again, the impending-CRE-collapse narrative is getting long in the tooth, and the damage has been limited so far. Had you asked me this time last year, I'd have said that in 12 months we'll know if CRE was going to become a crisis or not. Here we are a year later with 5-year treasuries at 4.2%. For banks like MTB, rising loss provisions have so far been dwarfed by faster-rising net income and healthy free cash flows.

[chasesfish]

@ChpBstrd your post is timely, I'm starting to go through some 10Ks of community banks I own.    Meanwhile every top 20 bank is up +/- 35% from the March lows in almost an indiscriminatory move.

I'm seeing some signs from lenders that took excessive risk, but stupid is as stupid does.  Generally the larger the bank, the more guardrails / talented people around that avoid stupid risk.  Even in horrible beurocracies like Wells Fargo or Citi, mediocre employees know there's career risk by approving bad loans.   The stupid risks I'm seeing are in smaller banks and in single asset class non-bank lenders. 

***

We seem to be settling into a higher for longer setup.   The good banks have mostly replenished the bond losses with two years of retained earnings.   Now the question will be what do they do next?   IMO, many of these banks should start taking smaller hits to earnings each quarter harvesting those losses, reducing their tax liability, and increasing net interest margin.    I'm invested in a community bank where 25% of their assets earn a whopping 2.17% and are mostly a greater than five year duration book.   The entire yield on the book only increased by 0.08% year over year.   I'm sure the management is worried about negative earnings growth, optics, ect, but these things are a loss.  Work your way out of them over the next eight quarters and enjoy reasonable margins going forward.

This community bank is otherwise competent:  Great cost of funds, good commercial credit, shockingly still making money originating boring $250,000 mortgages, and owns a small wealth management firm. 

[ChpBstrd]

@ChpBstrd
I'm seeing some signs from lenders that took excessive risk, but stupid is as stupid does.  Generally the larger the bank, the more guardrails / talented people around that avoid stupid risk.  Even in horrible beurocracies like Wells Fargo or Citi, mediocre employees know there's career risk by approving bad loans.   The stupid risks I'm seeing are in smaller banks and in single asset class non-bank lenders.

This is an interesting observation. I suspect it has less to do with resources or talent, and more to do with incentives.

Perhaps the person approving the loans at the small bank has stock options, and perhaps they realize their personal decisions have an effect on the metrics which determine the stock's price, and perhaps they have less oversight in a flatter organization. If a timebomb loan application comes along that would juice the stock price... maybe they go for it.

The Wells Fargo or Citi loan analyst, OTOH, is merely a cog in a very large machine. They may have the same stock options, but the risks they take as one out of 1,000 loan analysts are not going to move the stock price. Therefore they are mostly concerned with not getting fired, with not taking risks that could interfere with eventual promotion, and with surviving the sort of internal audits a smaller operation might not have.

Such a dynamic would leave the worst deals filtering down to the bottom-feeding smallest banks. Maybe the bargain is to pay 12-13x earnings for JPM, BAC, WFC, or PNC rather than picking up a bunch of vulnerable and tiny bottom-feeders for 8-10x earnings. I.e. very low risk banks are on sale, and very high risk banks are on clearance for just a little bit cheaper.

[chasesfish]

Such a dynamic would leave the worst deals filtering down to the bottom-feeding smallest banks. Maybe the bargain is to pay 12-13x earnings for JPM, BAC, WFC, or PNC rather than picking up a bunch of vulnerable and tiny bottom-feeders for 8-10x earnings. I.e. very low risk banks are on sale, and very high risk banks are on clearance for just a little bit cheaper.
[/quote]

That's a fairly accurate observation around Commercial and Industrial and Consumer lending, where there's unlimited capacity.   Regulatory restrictions on CRE lending mean there's more demand then capital to support it in the top 20 banks.

This is also why I mostly buy community banks that are in markets where the largest banks abandon.  You just don't see a larger banks put infastructure into 250,000 or less population markets, it's expensive infastructure and there are still lending needs there.   

[daverobev]

Bumping after a month since the last post.

Any thoughts on what 'higher for longer for longer' might bring to the bank stocks table? Anyone moving money to money market funds or whatnot?

[Michael in ABQ]

My portfolio of preferred stocks is now at an average yield of 7.61%. Down a bit from earlier as I've picked up a few more shares with some additional cash. But some of my first purchases were at 10%+ yields so I'm just going to hold these for now and collect some cash going forward.

[chasesfish]

Bumping after a month since the last post.

Any thoughts on what 'higher for longer for longer' might bring to the bank stocks table? Anyone moving money to money market funds or whatnot?

I would watch guidance more than anything this quarter.   I expect the actual quarterly earnings for Q1 to be boring.  Cost of funds flat lining for most while loan repricing continues.   The move in rates is bad for all the banks in various levels of bond jail, but mainly for their ability to grow their balance sheet with loans or repurchase shares, with cost of funds flatlining these banks will be fine to support 15% to 30% of their assets still yielding in the 2s.

Guidance on CRE will be interesting.   The rate moves are back above my 4.5% 5yr Treasury "line of demarkation".    That move happened after the quarter end, so what will these banks talk about related to loan loss reserves and provisions going foward?   They're all looking at operating statements on properties for 2024 and should have a much better idea what percentage of loans are good vs. what percentage are impaired.

As a reminder, the collapse narrative will be isolated to certain assets or geographies, NY might sign another law effectively seizing control of apartments from private owners.  That'll suck for the likes of VLY.    The other CRE loans are backed by assets that generate cash flow, now the question is how disciplined were various banks underwriting deals in 2020-2021?   Those buildings have seen four years of rent inflation, some cost inflation, but will now need to pay market rates at 7%+ instead of 4%.     Some banks did higher leverage deals with mediocre operators and I expect that to be exposed throughout the year.   Who starts talking about "isolated issues" and "one time" chargeoffs vs. which banks just methodically work through their portfolio as business as usual?

We're in that weird spot where generally banks make more money with higher for longer rates...the question is who benefits the most from it with the least amount of pain getting there?   Most of the large banks are up 30% from October and not really giving it back, so I'm not sure there's a huge buying opportunity. 

 

[ChpBstrd]

St. Louis office tower lost 98% of its value
https://www.morningbrew.com/daily/stories/2024/04/14/undefined

A long-vacant, 44-story office tower in St. Louis sold last week for $3.6 million, a 98% plunge from when it changed hands for $205 million in 2006.

Six of the 10 office districts in the US that had the biggest decline in foot traffic from 2019 to the middle of 2023 are in the Midwest...

Skyscrapers going for the price of a nice SFH in California...
Upon further research, US Bank foreclosed on it from an REIT in 2017, tried to sell it for 5 years, and eventually accepted $4.1M from SomeraRoad in 2022. Now they've lost a half million on it.

[Michael in ABQ]

St. Louis office tower lost 98% of its value
https://www.morningbrew.com/daily/stories/2024/04/14/undefined

A long-vacant, 44-story office tower in St. Louis sold last week for $3.6 million, a 98% plunge from when it changed hands for $205 million in 2006.

Six of the 10 office districts in the US that had the biggest decline in foot traffic from 2019 to the middle of 2023 are in the Midwest...

Skyscrapers going for the price of a nice SFH in California...
Upon further research, US Bank foreclosed on it from an REIT in 2017, tried to sell it for 5 years, and eventually accepted $4.1M from SomeraRoad in 2022. Now they've lost a half million on it.

There is a pair of office buildings here in Albuquerque that have been vacant a few years now. I appraised this pair a few times about a decade ago and they were 80-90% occupied, mostly by state government tenants. Those have all since moved out to other newer office buildings that are only 1 or 2 stories instead of having a department spread across 5-10 floors. There is also a very nice penthouse on the top floor of the 17-story building with amazing views as this skyscraper stands along miles from any others (plus a falcon that lives on the roof and hunt pigeons).

The smaller building in back housed the very first offices for Microsoft (originally founded in Albuquerque before moving to Seattle). It doesn't help that they're located at one of the worst intersections in the city that is constantly filled with homeless people due to a nearby methadone clinic - as well as a plasma donation center. It's so bad that Walmart shut down a store here because of rampant theft and hundreds of annual police calls.

I can't recall what they were valued at but it was somewhere around $5-15 million probably. Nowadays, they probably can't give them away. The elevators were decades old and would need to be replaced at a cost of hundreds of thousands (maybe a million), the floors were relatively small and not well suited to large tenants, converting to residential would be a non-starter. So they'll continue to sit vacant and get covered in plywood and graffiti.

[chasesfish]

We're going to see a constant drip of these office tower stories.  The reset of values isn't quick.

The 5yr treasury jumped again today.   We'll see if it can break 5% during this run.    I don't follow too many of the sensitive banks, but two VA community banks I watch with bond issues have given back 10-15% of their stock price in the last few weeks ($NKSH and $BOTJ).    There might be a buying opportunity in the ones with large enough non interest bearing deposit bases to carry the portfolio while it mathematically recovers.

I haven't dug deeply into other names on this, I have some exposure to a couple I can just add to at the correct price.

Interestingly, there's plenty of these low rate mortgage backed securities being prepaid.  The federal reserve managed to run off almost 100bil in assets in the last month.

I continue to think banks with large non-interest bearing deposit bases and reasonable credit risk are going to be big winners in a higher for longer cycle.

[chasesfish]

Tuesday update:  Still boring.

I watched $BAC release, the big bank I own out of the four.   I saw no reason to buy more and no real reason to sell.  Margins slightly up, chargeoffs up, yet reserves weren't increased (even though they had room to dos o), indiciating less signs of higher chargeoffs in Q2.    Still buying back a little bit of stock and building some capital.

The paydown rate on the Mortgage Backed Securities portfolio was *slow*...we may get some "BofA is insolvenet" posts again when people try to mark all the assets to market but not give them credit for 1.9% funding costs in a 5% world. 

Community banks start rolling in over the next two weeks. 

[Michael in ABQ]

We're going to see a constant drip of these office tower stories.  The reset of values isn't quick.

I actually just saw an article in the local business journal that an out-of-state developer is going to try and turn the smaller of those two towers into residential.

Good luck getting tenants in that area. Not to mention that conversion will cost as much, if not more than, new construction. The elevators and HVAC would need to be replaced and virtually every interior wall removed. You're getting a shell (after spending hundreds of thousands or more on internal demolition) at best that wasn't explicitly designed for residential.

[ChpBstrd]

5-year treasuries are now at 4.72%, close to the peaks of early October.

If I look at 30y bonds issued in 2022 or early 2023, I see that lots of them are trading at 15-20% discounts.

How long until we start seeing more bank failures, and which bank or banks will be the first to get into trouble? NYCB seems like the obvious candidate, but I wonder what other banks are sitting on badly underwritten portfolios? A list sorted by one-year default rates turned up what is generally a bunch of privately held microbanks.



The same list with 3-year default rates turns up some investable short candidates. Deutche Bank in particular seems to be having a terrible time, alongside European peers Santander and BBVA.

So maybe one idea would be to short DB and go long MTB?

We're going to see a constant drip of these office tower stories.  The reset of values isn't quick.

I actually just saw an article in the local business journal that an out-of-state developer is going to try and turn the smaller of those two towers into residential.

Good luck getting tenants in that area. Not to mention that conversion will cost as much, if not more than, new construction. The elevators and HVAC would need to be replaced and virtually every interior wall removed. You're getting a shell (after spending hundreds of thousands or more on internal demolition) at best that wasn't explicitly designed for residential.

Here's another example in NYC, where a 26-story Manhattan office was intentionally allowed into foreclosure by Blackstone, and resold by Deutch Bank for a 67% discount against its 2014 value. The loan was interest-only, and it's unclear how much equity Blackstone lost on the deal.

[chasesfish]

5-year treasuries are now at 4.72%, close to the peaks of early October.

If I look at 30y bonds issued in 2022 or early 2023, I see that lots of them are trading at 15-20% discounts.

How long until we start seeing more bank failures, and which bank or banks will be the first to get into trouble? NYCB seems like the obvious candidate, but I wonder what other banks are sitting on badly underwritten portfolios?

See if your screener can run a sorting of banks greater than $2bil in assets and sorted by lowest Price to Tangible Book Value.   Here's a link to a similar chart.

https://x.com/Aureliusltd28/status/1782491562431348769

Earnings season has still been mostly "meh".     There are some dogs of regional banks trading above tangible book value (TFC, CMA) and some community banks decently discounted.   Every analyst is pushing on credit every way possible, but still aren't finding a ton.   The balance sheet impacts of the 5yr move hasn't been nearly as impactful as last year.   Bond convexity at these higher rates isn't as bad and most banks have slowed down capital returns to shareholders and building capital.   $BOH had a decent quarter and they're the staple of interest rate issues.   

One *good* thing that came out of the GFC, bank dividends above 40% of earnings got major pushback, so banks wanting to return 100% of capital did the other 60% in buybacks.   Those have been easy to scale back without freaking out the markets.

The CRE story will still drag on, everyone's bucket is full.  Borrowers don't want to move their loans to the permanent market and don't want to transact right now, so they're mostly eating the change in interest expense or paying down loans.   Sunbelt multi and NYC are worrysome.

Watch the SBA heavy banks like LOB as well.   Rates going to 11% on their products hurt them both ways with more loans going to special servicing and less demand. 

If you want some fun, bet againt Arbor or ReddyCap.   The mortgage REITs that originated these 2021 and 2022 $30mil multifam deals have issues.

[chasesfish]

If you want a good example for the profile bank I think can get in trouble this cycle, take a look at Eagle Bank's Q1 Earnings

Most of these top 10 / top 20 cities have $10bil to $30bil banks that still act like community banks.   High levels of construction lending, high levels of CRE exposure, and ability to do much larger project sizes.   I knew a few that fit this profile in Dallas, Eagle is the main culprit in Washington DC.   Some cities like Atlanta don't have a candidate because the two that met this criteria sold a few years ago due to retiring management. 

These banks weren't formed until the consolidation of the 1990s, so they don't have the same funding cost benefit that the 100yr old banks have.   Similar to First Republic and Silicon Valley with a credit catalyst vs. a bond catalyst for the hit.

The feds have always forced these banks to keep a bunch of capital, so the push/pull is going to be just how big are the losses, they can absorb a lot of CRE pain with 10% Tangible Common Equity.

[ChpBstrd]

Thanks for the insights as always @chasesfish! The problem with book value is how it doesn’t tell one the quality of that book. Do you think we can use recent default numbers as a proxy for probable book quality and then evaluate book value with some manual adjustments for quality? Or, are real estate reset events like 2008 and now too idiosyncratic to model in such a crude way?

More empty office skyscrapers selling for a small percentage of their value from a few years ago:
https://sfist.com/2024/04/23/empty-office-building-at-sixth-and-market-which-last-sold-for-62-million-now-sells-for-just-6-5-million/

[reeshau]

The Wall Street Journal reports that regulators have seized Republic First Bancorp. The Philadelphia bank has $6B in assets and branches in Pennsylvania, New Jersey and New York under the name Republic Bank.

Lancaster, PA based Fulton Bank has bought substantially all the assets of First Republic.  Fulton has $28B in assets and 200 branches in Pennsylvania, Delaware, Maryland, New Jersey and Virginia.

Republic First had been in jeopardy of seizure late last year, but came to a deal with investors to shore up its balance sheet.  That deal fell through, leading to the current situation.

[chasesfish]

The Wall Street Journal reports that regulators have seized Republic First Bancorp. The Philadelphia bank has $6B in assets and branches in Pennsylvania, New Jersey and New York under the name Republic Bank.

Lancaster, PA based Fulton Bank has bought substantially all the assets of First Republic.  Fulton has $28B in assets and 200 branches in Pennsylvania, Delaware, Maryland, New Jersey and Virginia.

Republic First had been in jeopardy of seizure late last year, but came to a deal with investors to shore up its balance sheet.  That deal fell through, leading to the current situation.

First Republic is a perfect example of a newer bank in a top 10 city with a heavier real estate concentration. 

Their biggest problem though came down to board infighting.   Someone regulators allowed the company to spend tens of millions in equity in legal fees trying to prevent activist investors from coming on to the board.    Management didn't want adult oversight into the risk they were taking 2+ years ago and here we are.   There was no need for this failure.    Lots of personalities since one of the activist groups was connected in NJ politically.

Pretty small failure in the world of banking, but we'll see a few more like this.

Here's a good article from Bank Director around First Republic. 

[chasesfish]

Thanks for the insights as always @chasesfish! The problem with book value is how it doesn’t tell one the quality of that book. Do you think we can use recent default numbers as a proxy for probable book quality and then evaluate book value with some manual adjustments for quality? Or, are real estate reset events like 2008 and now too idiosyncratic to model in such a crude way?

More empty office skyscrapers selling for a small percentage of their value from a few years ago:
https://sfist.com/2024/04/23/empty-office-building-at-sixth-and-market-which-last-sold-for-62-million-now-sells-for-just-6-5-million/

We're going to see those office tower headlines through 2026, just remember those are LifeCos and CMBS lenders making $30mil+ permanent loans.

What most people are doing for the at risk banks is looking for CRE concentrations > 250% of equity, then digging into the geography and product type disclosures in the investor presentations.   NY multi has some people excited, sunbelt multifamily construction has headwinds.   Lack of an old deposit franchise is key too, in the community bank world I own three banks in a market.   The two old franchises are working on a 3.60% net interest margin and the one founded in the 1990s has a 3% margin.   Same applies for larger banks.    Margins are mostly stabilizing now, heading up for some, decelerating for the others.    That's a lot of additional room to build reserves, absorb losses, or survive as a mediocre lender if you sit on an old deposit franchise.