Small Bank Opportunities
Community Banks offer a tremendous opportunity in the face of the Silicon Valley Bank collapse
The rise and fall of Silicon Valley Bank is all over the news. On Friday the bank’s stock was halted and the deposits and remaining assets went into FDIC receivership. Throughout the weekend my entire Twitter feed has been filled with panic, outrage, and excitement surrounding the first major bank crash since 2008. The bank crash has brought a lot of uncertainty to capital markets and the following weeks will be extremely interesting as an active investor.
The crash of Silicon Valley Bank will likely lead to additional bank crashes, outright failures and a mass exodus of capital fleeing financials in the form of stock price devaluations and a large decrease in deposits at American financial institutions. The fall of Silicon Valley Bank might be the first straw to break the economy’s back, leading to a global recession, a further decrease in asset values and eventually the Federal Reserve quickly changing their policy on quantitative tightening.
The decisions Federal regulatory officials make over the next few days will be key to what American depositors do with the cash they hold at their own financial institution. If the government lets Silicon Valley Bank fail and provides no bailout to depositors with more than $250,000 in cash, Americans and business owners will respond by evaluating the merits of their own financial institution’s ability to survive a continued aggressive rate increase and global downturn. Should the government bailout depositors there will be a less likely chance of a massive run on banks across the country.
Trained as a value investor, I think in worst case scenarios far too often. I don’t want to lose money and I like buying assets for dirt cheap. For the better part of the decade I have been preparing for a global financial crises driven by high debt loads, leading to hyperinflation and cured by printing even more money. I’ve talked myself in circles on this newsletter about owning physical gold, silver, raw land and your own dwelling on a 30-year term with a low fixed interest rate.
I’ve been stockpiling physical gold and silver in the event of a major tail-end financial disaster. With one years worth of living expenses in physical gold and silver I feel pretty well prepared should the worst case scenario occur — Americans losing confidence in the U.S. Dollar. I own my personal residence with a 30-year term at a fixed rate. If hyperinflation takes off my monthly cost remains the same and could be eliminated if the money printer goes full blast. I personally don’t own raw land but have used my parents large amount of owned acres as a proxy should I need to flee a city.
That being said, we probably don’t end up in a full blown financial crises where the dollar loses all of its ability to hold value. At least not in the next 12 months. And hopefully never, as that situation would change the entire landscape of America as we know it.
In the meantime I think there will be a tremendous amount of fear from investors in financial institutions. I plan to use this opportunity to buy cheap bank stocks significantly below replacement value. Banks could get extremely cheap over the next few weeks and an informed investor buying cash rich, asset heavy and small local banks in rural America could do extremely well for themselves.
Before the Silicon Valley Bank failure, I started writing about opportunities I have been seeing in small community banks — specifically post mutual banks that have converted into a public corporation. Please see my writing on small bank opportunities here, here (on thrift investing), here (for a cheap thrift) and here for a couple of bank ideas.
My thesis on bank stocks was done before the fall of Silicon Valley Bank. In an article I wrote a couple weeks ago, I highlighted the interest rate risk and flee of depositors acting as a double edged sword to bank valuations. Little did I know, a bank would fail a few weeks later after writing these words…
If the market was not aware of this risk a few weeks ago it certainly is aware of this risk now.
As investors evaluate the financial situation, I think we will see bank stocks get pretty cheap. Most will survive. Some will go bankrupt. And others will thrive. My goal is to find the cheap ones trading for such a low price an investor won’t be taking much capital risk investing in them. I love investing in out of favor industries and I think financials will be incredibly out of favor.
Over the next few days I plan to release a preliminary list of small bank stocks to Alpha Letter Pro Subscribers. From there we will narrow down the best opportunities for the active investor. Within the Telegram group, there is a community bank channel that I will be talking in daily with hundreds of other investors. If you want access to my future research on small community banks and want to join our active Telegram group where we discuss value stocks on a daily basis, become a paying subscriber today.
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Looks like we are getting a bailout
To support American businesses and households, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy.
The Federal Reserve is prepared to address any liquidity pressures that may arise.
The financing will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.
With approval of the Treasury Secretary, the Department of the Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP. The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds.
After receiving a recommendation from the boards of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, Treasury Secretary Yellen, after consultation with the President, approved actions to enable the FDIC to complete its resolution of Silicon Valley Bank in a manner that fully protects all depositors, both insured and uninsured. These actions will reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers, and the broader economy.
The Board is carefully monitoring developments in financial markets. The capital and liquidity positions of the U.S. banking system are strong and the U.S. financial system is resilient.
Depository institutions may obtain liquidity against a wide range of collateral through the discount window, which remains open and available. In addition, the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing lendable value at the window.
The Board is closely monitoring conditions across the financial system and is prepared to use its full range of tools to support households and businesses, and will take additional steps as appropriate.
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