TrackStar’s Top 3 Regional Banks to Avoid

Today’s edition of The Spill is a little different.

Recently, we delivered a piece on three regional bank stocks we loved.

After First Republic’s weekend firesale, we thought it only fitting to talk about banks you should avoid.

Using our TrackStar data, we pulled in the top regional bank searches by financial pros.

We then layered in financial metrics as well as performed some in depth research.

Here’s the three we came up with.

PacWest Bancorp (PACW)

Overview

Since the fall of SVB, there’s been a lot of scuttlebut around PackWest.

The Beverly Hills-based bank maintained significant relationships with venture capital firms.

In its latest quarterly earnings, the company noted that venture banking accounted for 23% of its total deposits, a huge decrease from the prior quarter.

Source: PACW Investor Relations

While venture capital loans have decreased in total, they still make up a significant chunk of the company’s total portfolio.

Source: PACW Investor Relations

PACW borrowed heavily from the federal home loans program to shore up its finances.

Source: PACW Investor Relations

The company already explored a sale of its Lender Finance Division as a way to raise capital. So far, it hasn’t found any takers.

Our Reasoning

Less than 10% exposure to venture capital might not seem like a big deal. 

However, if even half of those loans sour, the bank is screwed.

Customers pulled a huge chunk of cash out of the bank despite 70%-80% of deposits being insured.

This says nothing about its other loans which could have hidden dangers as well. And with its heavy presence in California, it doesn’t have geographical diversity to help it weather the storm.

We expect this bank to fail before all is said and done.

Western Alliance Bancorp (WAL)

Based out of Phoenix, Arizona, Western Alliance is rather diverse for a regional bank with branches as far away as Massachusetts to Washington.

The company has similar exposure to technology companies, though not as bad as PACW.

And its initial deposit outflows appear to have reversed themselves.

Source: PACW Investor Relations

So, what’s got investors worried?

Two words – Unrealized losses.

Bank investments are set up as mark-to-market, where they continuously adjust the value, and held-for-investment (HFI), which is held without those adjustments.

Selling HFI before maturity forces the banks to realize losses if rates have increased since the time they purchased the HFIs.

What can cause a bank to sell HTM before maturity?

Deposit outflows force banks to raise money by selling HFIs, exactly what happened with SVB.

Source: WAL Investor Relations

The balance sheet highlights the massive amount of HFI that hasn’t been marked to market (IE losses realized).

Our Reasoning

Western Alliance has a 50/50 shot of survival. It’s doing all it can to shore up its balance sheet.

However, those efforts mean the company won’t generate profits close to what it did, leaving the stock languishing at lower prices.

New York Community Bancorp (NYCB)

Jamie Diamond made a brilliant play for First Republic’s (FRC) assets.

NYCB didn’t get as good of a deal when it took over various assets and branches of Signature Bank.

NYCB operates as the holding company for Flagstar Bank, with 435 branches spread across New York, New Jersey, Ohio, Indiana, Michigan, Wisconsin, California, Arizona, and Florida.

We don’t believe NYCB is in any danger of failure. It has ample liquidity and a sizable deposit base.

Source: NYCB Investor Relations

However, NYCB is heavily weighted towards HFI loans, similar to WAL.

Source: NYCB Investor Relations

Unfortunately, the company has a huge presence in the New York commercial real estate market, which isn’t booming right now.

Now, that’s only a portfolio of $3.4 billion in loans. However, writing off even a fraction of those would be a disaster.

Our Reasoning

NYCB isn’t likely to disappear. But it isn’t likely to grow either. 

The company’s share prices have slid since their highs in 2004 and rarely gain more than 20% over several years.

This stock is just dead money with their exposure to Manhattan real estate.