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.
