• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing

Banks Are Complex and Valley National Is No Different: Here's the Play

When it comes right down to it, I only care about Valley's balance sheet and where the preferreds sit in it.
By JIM COLLINS
May 02, 2023 | 01:00 PM EDT
Stocks quotes in this article: GOOD, VLY, VLYPO, BEARX, FHI, ZION, VLYPP

Yesterday I was deep in the midst of my Gladstone Commercial (GOOD) reverie, ahead of their quarterly earnings report which will be released tomorrow after the close, when one of my subscribers pointed out to me that Valley National (VLY) was sliding.

The common, VLY, fell by nearly 20% yesterday, and the floating-rate preferreds, (VLYPO) , a constituent of my WYLD (currently-floating-rate preferreds only) model portfolio, also was sold off heavily, and finished the day trading at $16.50, which is 66 cents on the dollar. In the midst of today's broad market selloff, VLYPO has fallen again, and was last quoted at $15.25, so 61 cents on the dollar.

As VLYPO is a currently-floating rate pfd (with quarterly payments based on LIBOR plus 3.875%) and 3-month LIBOR is currently 5.3% ahead of today/tomorrow's FOMC meeting...VLYPO now has an effective annualized yield of 14.28%. Not a typo.

For my own account, I had one more lever to pull... and I pulled it. I had a six-figure amount in (BEARX) which has been a truly awfully performing short fund run by Federated Hermes (FHI) . BEARX, which didn't do particularly well even when the overall market was bleeding, was converted into VLYPO today for my account.

I spent three hours poring over VLY's financials last night, and that is not a labor of love. It gave me new appreciation for GOOD. Gladstone Commercial quite literally only needs its tenants to continue paying rent. Valley? Oh, man. So many moving parts.

First and foremost Valley's loan-to-deposit ratio was very near 100% at 3/31/23, results that were reported last Friday. This is manageable, yet leaves VLY at the mercy of a deposit run. VLY offered very bullish statistics on deposits, and during the quarter utilized not only the FHLB funding window (Zions (ZION) is also doing this) but actually sourced new deposits, to the tune of a $1.2 billion sequential increase in "fully-insured brokered deposits."

I need to educate myself on this process, but essentially Valley is buying deposits from other banks. As with everything else in banking that comes with a cost. So, VLY's net interest margin contracted from 3.57% in 4Q22 to 3.16% in 1Q23, and that margin erosion was the gist of Raymond James' downgrade yesterday.

But remember, by buying VLYPO, we are creditors of Valley, not equity holders. Preferred stocks are bonds. Simple, but true. Jimmy Crack Corn... and I only care about Valley's balance sheet and where the preferreds sit in it.

VLY had $6.5 billion of Total Equity at 3/31/23 and the two preferred series (VLYPO and (VLYPP)  which will not float for two more years) represented about $210 million of that total. Pocket change.

If it were any other time but the present, VLY would simply call VLYPO, which has been callable (and thus floating-rate) since 6/2022. Why haven't they? Why are they allowing one of their securities to trade with a 14% yield? Especially when it represents less than 2% of their total equity capital...

Because it's 2023.

That said, at some point, some way, I do believe Valley will call VLYPO. At 61 cents on the dollar, a called pfd (at $25/shr) would yield greater than 50% upside. Plus the 14.28% effective yield???

I gotta have that. This morning I bought VLYPO in size.

Banks are so complex, with multiple capital ratios (VLY's tier 1 ratio actually increased one basis point sequentially to 9.02% in 1Q23) and varying flavors of quality of deposits and loans. VLY's allowance for credit losses sat at 0.95% of its total loan book at 3/31/23, actually down slightly form the 12/31/22 figure of 1.03%.

VLY is not overly exposed to commercial office real estate (much more biased toward residential) and, VLY's presentation specifically noted that Manhattan only represents 6% of VLY's CRE loan book. As a New Yorker, I do not take offense at that. I live in Queens. Excesses tend to occur in Manhattan.

I went all-in on VLYPO this morning. I am running toward the fire, but I really don't have that many bullets left to fire. With 50% upside for VLYPO (if called) and a 14.28% effective yield, I think VLYPO is worth the stress.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Jim Collins' firm owned GOOD, GOODO, GOODN and VLYPO.

TAGS: Earnings | Investing | Markets | Preferred Stocks | Stocks | Trading | Banking

More from Investing

This Is No Time to Put Money to Work

James "Rev Shark" DePorre
Oct 2, 2023 4:04 PM EDT

The government shutdown deal did little to move stocks on Monday after the open.

Microsoft: Will Strength or Weakness Win Out?

Bruce Kamich
Oct 2, 2023 2:26 PM EDT

Let's check the charts and indicators.

Trading Coinbase Is More Than Just a Flip of the Coin

Bruce Kamich
Oct 2, 2023 1:30 PM EDT

The stock rallied early Monday, but those gains are fading.

Methanex Is Having Trouble Lighting Up

Bruce Kamich
Oct 2, 2023 12:51 PM EDT

Here's how aggressive traders could play this methanol maker, and why everyone else might want to keep on the sidelines for now.

Oil's on the Front Burner, and It's Getting Overcooked

Peter Tchir
Oct 2, 2023 12:30 PM EDT

Let me show you with one simple chart why the moves in this energy commodity are overhyped.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 12:13 PM EDT BRUCE KAMICH

    8 Trading Rules from T. T. Hoyne

    You just read the header for this missive and prob...
  • 08:42 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    How Elite Traders Make Big Profits
  • 02:58 PM EDT BRUCE KAMICH

    Classic Trading Rules From Bernard Baruch

    Bernard Baruch listed the rules (below) in his aut...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login