Small Banks Hold Better Credits Than Regional Banks, And They're Cheaper

I think it’s safe to say that most value investors believe the market is overvalued.  But that doesn’t mean stocks can’t appreciate like crazy…hence the Gamestop situation.  The question is what do those do, those who look to buy things at a discount?

I’ve watched the stock market madness with intensity.  I HATE to overpay for anything, from something cheap to something expensive.  I’m always hunting for a bargain.  The problem is no one is bargain hunting anymore.  It’s a first in wins market.

We have some friends who are in their early 20’s and who recently purchased houses.  They explained that they’d get an email alert when a house listed, and within a few hours there’d be dozens of offers on the house.  They had to view and pick the place they’d live for the next decade in an hour.  This is absolute madness.

When my wife and I looked at houses (circa – 2015) we’d look at a place, ponder, look again, ponder, look again and then make a decision.  It always seemed strange to me that you could walk through a house and within an hour decide that you’d want to live there for decades after a simple walkthrough.

People who are looking now have no advantage of time, they’re rushed by the market to make a decision, any decision as quick as possible.

When I think about this it seems like it isn’t conducive to good outcomes.  Imagine having to decide on a spouse on the first date, or a job based on how the building looks from the parking lot.  There isn’t enough time to determine what the other side is like.

The thing is everything is rushed now.  Stocks, houses, spouses, everything.  If you can’t make a snap decision you’ve messed up!

Can you imagine what our ancestors would have thought of this?  Someone who spent months walking between cities, or years working as an apprentice.  They’d think we are crazy and stupid.  Yet that’s where we’re at!

A good friend of mine will send me pictures of sales as they’re happening.  He’ll shoot me an iMessage image of a beer that’s one sale, or some other crazy deal with a message like “wow, can you believe the price?”  I always chide him that when you see a bargain that’s the time to purchase.  He misses most of these thinking that the deal will remain forever.  When I see a bargain I jump on it right away because I know that bargains are situational.  Something that is cheap now probably won’t be cheap in a week or month.

The corollary to this are Oddball stocks that have been cheap for weeks and months and years.  Investors are losing patience and are giving up.

What does this mean?

A year ago I started to get calls and emails that investors were dumping their Hanover Foods shares.  Eventually I realized there were no investors left standing in this stock.  I thought that if everyone gave up it would be some sort of sign shares would start to appreciate.  Instead nothing happened.  Maybe they will eventually, but it hasn’t happened yet!

I think that’s similar to a lot of these stocks.  We purchase some dowdy share and think “since no one else is buying it’ll pop quickly.”  Nope, they wallow at a low valuation until suddenly one day they pop.

The thing is most stocks don’t pop if their business never changes from something terrible to something mediocre.

As we’ve talked to banks at we’ve realized something significant.  Headline stories on business don’t tell the whole story.

There are banks that are deposit constrained and want to lend more, but most banks are lending constrained and want to lend but don’t know who to lend to.

These banks are looking for solid owner occupied credits that aren’t likely to default.  The problem is these credits are few and far between.

Anyone looking to purchase a vacant office building?  The market is flooded with those!

Let’s talk offices for a minute.  I know remote working is the rage right now, and it has to be.  But is this trend something that’s going to continue?  I don’t know, although workers are largely stating their opinion that they want it to continue.

One of my younger brothers works in healthcare, and his company put out an anonymous survey asking who’d like to work from home full time, part time, or from the office full time.  He said 70% of survey recipients wanted to work from home full time, with 25% part time and 5% full time.  The company listened and decided that they’d adjust their policies.  It had worked well enough in 2020 and 2021, so why not?

This is an enormous office space lessee in Northern Ohio.  What does this mean for the market?  It means that most companies are going to be reducing office space.  Maybe not dumping the office entirely, but some portion of it.

The people who need to worry are landlords and banks who bet heavily on white collar workers.  The majority note holders of this asset class are regional banks.  It isn’t a small community bank that owns a note on a $250m office building, it’s the name brand regional bank that owns the note.

If companies reduce their office space by 20-30% this is going to create a significant issue for regional commercial banks that own notes on these buildings.  Who is going to purchase this office space?  Will it be the upstart tech companies that are remote only?  If it’s not them then who?  There isn’t a natural buyer, and hence prices could drop through the floor.

As we’ve talked to local banks they are interested in owner occupied commercial real estate, but nothing office related (unless it’s a doctor or dentist).

If we extrapolate that out it’s a depressing print for regional banks and downtown office buildings, but not that awful for smaller banks that have avoided those buildings simply by size.

What’s crazy is the market is penalizing these small banks as if they’re dead.  Most are not, and many are thriving!  The problem is the larger banks exposed to the latest COVID trends are dragging down the smallest banks.

This presents an awesome opportunity for investors to investors who are interested in picking up shares in cheap banks that are still relatively safe.

It’s my view that sitting patiently and waiting for deals is much better than being sucked up in whatever mania is present at the moment.  Patience always wins the day!

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