When I saw news of the vaccine this morning I thought of a few things. First, I thought how my RWM short hedge was going to get killed. Second, I was glad I was short some SaaS. And third, I thought how I gotta buy more banks.
Last week I described how I had gone through all my bank earnings reports. My assessment was that they were not “super exciting”. I further went on to say that it was “hard to get excited” about any of them (other than CUBI and SI – the latter of which is not really a bank in any traditional investing sense) and that I was reluctant to buy them unless I wanted to “close my eyes and wait it out”.
So… that vaccine news makes the wait more of a blink. Instead of having unknown liabilities on their balance sheet, you can look at all the same bank names, bogged down with their exposure to hospitality, restaurants, energy and even CRE and you can say, as long as their LTVs aren’t too high and their counter-parties are on the stronger side, they can probably make it past the COVID-vaccine finish line.
Of course some of the bank names moved right off the bat and I couldn’t bring myself to add. I didn’t buy any more CUBI, and I didn’t add UBSI or CADE, even though I would have liked to, because these stocks were up 15% right at the bell.
But there were others where the market was not so efficient. BSVN took a while to figure out what had happened. BCBP took even longer. MLVF and SBFG were slow movers as well. There are other, even more illiquid ones, that have not moved much at all yet today.
I still was buying them up from Friday’s close though. With BSVN and SBFG I bought them up 5-7% on the day. That maybe seems crazy on the surface. But consider BSVN for example:
BSVN was an $18-$19 bank in February. Tangible book is about $11/share. By all indications they are solid lenders in Oklahoma/Texas. Their track record looks fine (though I am no expert).
Really, the reason that BSVN has taken it on the chin, at least as far as I can see, is because they happen to lend to a bunch of hotels. Hospitality is about 21% of their loan portfolio.
These are generally big chain hotels, so Marriott, Holiday Inn, Best Western and such. The LTV on these loans is 63%. The replacement value of the collateral on a per room basis is $115,000 while the loans are pegged at $45k/room.
So BSVN was in for a tough go of it if COVID kept on for years. But you can kinda see that BSVN is likely okay if COVID is on its way out by the spring.
The news today suggests COVID does not drag on forever. So yeah, BSVN hit $10 this morning and I think its almost $12 now, but I think there is a reason for that. The reason is that if COVID is done by this time next year then these loans are going to be just fine and BSVN should be able to go back to being the same bank it was in February.
At least this is the way I’m thinking about it. You can go through the loan books of the other banks and draw similar conclusions. That restaurant exposure is likely not the albatross it was. Maybe even that energy exposure isn’t as worrisome. You have to remember, they don’t own the business, they just lend to them, so all that matters to them is they can eke it out until things normalize. And the odds of that just went up.
How does your portfolio look like now?
I keep meaning to. I’ll try to get it in the next couple of days. I don’t think I’ll do a post, just put up the new list on the portfolio page.
I can quickly rattle off the names I own right now.
Canada: AHC, CLIQ, CNX, GCM, GLDX, IFX, IMP, PTQ, ROXG, SDE, SGI, SXP, TGH, VLN
US: BCBP, BSVN, CDLX, CUBI, DLHC, DXYN, EAST, EIGR, ELMD, IDN, ISSC, KOPN, LLNW, MLVF, RADA, SBFG, SFBC, SHSP, SI, SMIT, SMSI, TIKK, WTRH
I updated it on the portfolio page. I don’t think I’m to dedicate posts to updates any more.
I’ve been trying to put together a watch list of banks for a few months now. Out of curiosity, do you recall where you first discovered CUBI, CADE, BSVN, SBFG and others? I’ve used regional and community bank funds as an initial list for further research. Did you know there’s a community bank ETF (QABA)? I only just found that. Also, Elizabeth Park Capital is a bank-focused RIA with the thesis that there’s a multi-decade consolidation in place and they’re trying to hold buyout candidates: https://fintel.io/i13f/elizabeth-park-capital-advisors/2020-06-30-0.
Out of curiosity, was it just a technical breakout that caused you to buy DXYN? I’ve been watching that for a while after learning about a major competitor of there’s exiting the business a few years back.
BSVN and CADE were mentioned by or mentioned in tweets liked by or written by @timyanbankalert on twitter at some point. I always look to him to find banks. CUBI I found from MFAC when I was looking at SPACs. SBFG I don’t even remember, I have owned that bank on and off since like 2010 or 2011, when it used to be called Rurban.
As for DXYN, I’ve followed them for years, I think I lost money on them in like 2014 or something. But every quarter I dutifully enter the numbers in my spreadsheet and every quarter its shit but in Q2 I noticed they weren’t half bad all considering. But I didn’t do anything. And then Q3 came around and I was like, wow, this isn’t terrible. And the call is talking about residential accelerating and we can see they’ve done a few fairly smart things lately with the capital structure, and so I just made a punt on it, thinking they have a bunch of needles that are for once pointing in the right direction.
Got it, thanks.