It Pays to Know If Banks Are Doing Anything Stupid

The big "money center" banks are at the pinnacle of the U.S. and global economies. Like sleeping next to an elephant, every single little move they make has an outsized impact on every dollar you own. No investor can afford to ignore what they're doing, lest they end up on the wrong side of a gigantic capital wave.

The regionals - banks with presence in five, 10, or more states - are different. They're important, don't get me wrong, but I watch them like a hawk for the same reason I listen to the results of my annual physicals: to make sure everything's working right, and nothing disastrous is looming out there.

That's because, as the history of the financial crisis clearly tells us, regional banks are where you find the very first signs of the kind of gross stupidity and borderline criminal behavior that can spread to the money centers.

It's like "monkey see, monkey do," except the sequence runs, "little monkey do, big monkey see, global economy gets knocked for a loop."

And the regionals' earnings calls are where the first indications of this show up. That's why I never miss one...

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Here's What the Regionals Are Telling Us

The biggest thread woven across the regional bank calls was largely expected: that loan demand picked up in the first quarter following the big, shiny, brand-new tax reform.

Out in California, Steven Gardner, of Pacific Premier Bancorp Inc. (Nasdaq: PPBI), had an extremely positive outlook. He told analysts on his call that his firm remains optimistic that the "effects of tax reform and a strengthening economy will translate into increased loan demand."

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It makes sense that nearly all of the regional banks harped on that theme. Since corporations are now seeing the benefits of tax reform and starting to expand their businesses, loan pipelines at these regional banks will quickly fill up. That obviously leads to stronger bottom lines and strong performance for the rest of 2018.

But from my perspective, the best news is that credit conditions remain excellent.

Much has been said about credit cards and auto loans worsening, but the story just isn't reflected in the numbers. The delinquency rate of credit cards for all U.S. banks is just 1.65%. For autos, it's only 0.42% of total loans, according to the most recent Reports of Condition and Income, or "Call Reports," filed with the FDIC.

A big takeaway: The economy isn't spectacular, but it's doing okay, and again, the bankers aren't up to anything stupid... yet.

The onset of said stupidity is likely to be delayed by the prospect of rising rates this year, with the next rate hike expected next month.

By this point, we're far enough along in the cycle that we'd usually see some bankers with no gray in their hair do something spectacularly stupid to pick up an extra 100 basis points of return.

But for now, it seems that the prospect of higher net-interest margins is containing the recklessness. Should the economy slow and the expected hikes not materialize, I would expect the "Bank Train to Dumbtown" to speed up a bit.

Instead, the rising rate environment appears to be making these bankers more strategic and diligent in their decisions. They're looking for ways to grow their businesses in what's quickly becoming a more competitive environment.

And as any thick-skinned capitalist knows, competition makes the world of profits go round...

The Regional Banks Are Actually at Each Other's Throats

As rates have begun to rise, deposit competition has become fiercer and fiercer. Kevin Cummings Burke, CEO of Investors Bancorp Inc. (Nasdaq: ISBC), talked about this and the ways his business is preparing to remedy it.

He noted, "On the business and commercial side, we saw some runoff in deposits due to increased competition in our market for deposits... in reaction to these competitive pressures, we have just recently launched the deposit campaign for the branch network and, today, actually, we are launching our online money market product..."

When this much money and growth and competition are in play, a banker's thoughts turn to... M&A plans. That's actually been a common theme in these calls for the last seven years.

Because while the economy may be chugging along, it's only doing so at about a 2% rate. That's nowhere near enough to satisfy Wall Street's insatiable appetite for earnings growth.

The only way to satisfy that appetite in an anemic economic growth environment is by purchasing assets and deposits.

This much was made clear by Aaron Graft, the founder and CEO of Dallas-based Triumph Bancorp Inc. (Nasdaq: TBK), who discussed M&A prospects on his investor call this month.

He particularly expressed interest in acquiring land in his home state, as well as across Colorado and New Mexico: "We've called out before that West Texas was an area we've looked that still remains an area of interest for us... We're the eighth largest if you take banks under $20 billion in assets, I think, we're the eighth largest in Colorado, pro forma these transactions, we would like to continue to take ground there as well, and then we think there's some opportunities in New Mexico."

Whether it be by developing new deposit campaigns or by snatching up properties in the Midwestern United States, regional banks are making efforts to grow their businesses responsibly in this stagnant economy.

So these banks, the unsung arbiters of the economy that they are, don't seem to be making stupid decisions - as far as we know.

That's why checking in with the regionals is so important.

By listening in on the most recent round of calls, we were able to learn that the economy is chugging along, albeit at a low rate. We learned that credit conditions are fantastic, M&A activity remains strong, and banks should see an earnings pickup from tax reform and higher interest rates. Tax reform is also providing a boost to businesses and that bodes well for the near-term direction of the U.S. economy.

The good news: Stupidity is nowhere on the near- or intermediate-term horizon, and that leaves us with an environment ripe for profit-making.

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About the Author

Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.

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