2025 = Biggest Bank M&A Year In History? Bank Zhar Brad Rinschler on Credit, CRE, GBank, REIT Pain, and Much Much More
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this door. Happy to be joined today by Brad Rentschler, founder and managing partner of Downrange Capital Management. Brad, great to see you. Welcome to Monetary Matters. Thanks, Jack. Happy to be here. Tell us, so you're a banks investor. What's your view on the banks right now as we stand here going into February?

So, our view on the banks actually has changed a bit. If you've followed us for a couple of years, the performance in the fund has been really good, but we really kind of didn't like the bank setup kind of going to 22, 23. So, we were short a lot of the banks that kind of had some troubles and actually failed in 23. 24 was a great year for us, kind of worked on both sides. Now, we actually like the banks here and the setup, especially community banks.

Most of the portfolio is trading under book with significant buybacks and pretty high dividends. Probably the average dividend of the fund is 4% or 5%.

some as high as eight. So we actually like them going forward here. The new administration is going to be friendly to mergers in community bank space, which has been really, really a headwind for the last four years. You haven't seen a lot of mergers and a lot of them take two, three years sometimes to complete. Buyers were kind of gun-shy announcing deals. So we do like them going forward here with the valuations right. Some of the names that are in the KRE or XLF are a little expensive.

It's kind of not where we fish. We fish kind of smaller banks under $5 billion assets, some on the OTC bulletin boards or on the NASDAQ.

So you've had a good performance in your fund, I know. Congratulations. So Brad, I'm looking at the big financials ETF. A lot of these are not even banks like Berkshire Hathaway or Visa. But even if looking at a specific bank fund, JP Morgan, Goldman, Morgan Stanley, Wells Fargo, Bank of America, that's not really your sweet spot. Your strike zone is not even in the even more specific regional bank CTF like PNC or...

you know, regional regions, financial corp citizens, you strike in the community bank world as well as the more mid cap bank world. Why do you like to swim in that pond as opposed to the larger world of the JP Morgans and the like? Valuations better, right? Probably more up to merger, more up to see mergers with premiums, easier balance sheets to kind of understand, you know, our thoughts on it. And there's a lot less fishermen in those ponds, right? So valuations are right.

They're true community banks, which we believe is going to mirror the economies that they serve. You could see us own a Pennsylvania bank that's in three counties with 10 branches. That's kind of like what we'll look at.

And like I said, we look at regions or PNC or an M&T. One, you know, our model and then Alice models not completely different much. And also, it's just hard to get visibility into the total company. Right. The balance sheets are a little bit more construct. Same with JP Morgan. I mean, someone someone last week of Morgan's earnings were good. You know, it's obviously good for the banks. Maybe.

not kind of what we play. Just what I've done for 25 years. We kind of live in a box and we don't really come out of it. I like that. What is your history? How, how did you get into the box of small banks? I actually just liked them. I mean, coming out of college, I liked them, started a hedge fund. It kind of said, Hey, pick a sector to kind of focus on. So I've picked kind of financials and then kind of just kind of moved into the banks over, over time, went to the sell side for a bunch of places and,

kind of bounced back and forth and then in 2020 when covet hit and the banks got hit you know partner and i just ran around and you know launched the fund on july 1st of 2020. it's a pretty good time to do it banks are down about 50 on the year at that point and why were you negative in 22 and 23. so the end of 22 started getting a little concerned here you know we had an interesting move here we started to have an interesting move that was going to be

pretty impactful to you know kind of the securities book the loan marks interest rate marks alice was saying they were just those marks right they just oh they're just synthetic you know they'll get that back over time and we took a pretty hard stance that's that those marks are real and we bet on it and we were out very publicly talking about it because if back near that capital they just didn't have it oh we're going to get that back over five six seven years

A lot can happen between now and then. You know, in the regulatory side of it, kind of knew that, I think. I mean, there's all these, you know, stress tests, you know, shocks to the balance sheet, 100 base points, 200 base points, oh, just do 300. We had 500. So not only knew the impacts of that balance sheet, it just was bad. On top of that, before that, you know, kind of all came to head,

You know, community banks are trading over 13 times forward earnings. And, you know, one of our slogans, I mean, you have to go buy the dip or, you know, you know, the Magnificent Seven. There's all these like kind of memes guys use to to invest, which I kind of laugh at. But, you know, I'll give you one. You know, if you sell banks at 13 times forward earnings, you make money every time.

So the setup was there. And then obviously, there was something really fundamental that we saw. And we had arguments with the whole with the sell side is, you know, these weren't just marks. And we're still seeing that today. So the Federal Reserve raised interest rates, shocked markets in 2022 and 2023 from zero to 5.5 percent.

Almost every bank, Brad, in their investor presentation will say, what happens to our earnings if interest rates go up? And almost every of them will say that they make money as interest rates go up because they're net income sensitive.

But I think number one, that does not include at all the impact of the balance sheet, because when interest rates go up, their fixed asset, the fixed rate loans, as well as their securities, regardless of whether they're available for sale or health or maturity, go down in value. And that's real. And you're saying that's real. And then also the liabilities, they pay a lot more on deposits. And when they go up so quickly, the cost of deposits can go up really quickly and they can have a high deposit beta, unlike if

if it's a slow interest rate hike cycle, you can kind of sneak, banks can kind of sneak it in and not really raise rates that much, right? Well, the problem was, is that, you know, the U.S. Treasury came out with Treasury Direct, which means, you know, you can basically, you know, invest in treasury yields. And the treasury yields were better than a CD and they have daily liquidity. You can sell it whenever you want. So what you were seeing was actually the Federal Reserve was

and treasuries were actually a competitor of banks for deposits so i mean you could have a you know say guys a hundred thousand checking account they can wire it out to treasury direct that day ceo won't even know that they lost that money and do that you know times a hundred and you know it doesn't take much for a bank to get in trouble i mean if 10 of deposits walked out in one day out of any bank in the country it would be done that's kind of what happened so on top of

deposit pricing becoming a problem. There was also a deposit flight that was going to US Treasuries. And the bank couldn't make a CD that made any sense because I could always just go get more yield at a treasury and ideally quit and have it locked up. And that's what we saw. It was kind of like a perfect storm. And the banks, it was interesting, the banks really didn't hedge much on their securities portfolio. And it kind of drives me nuts because if anyone, any bond company

could have saw this coming. I mean, they could have made their, you know, their career here by just hedging out banks, you know, securities books. I mean, some of us have six, eight, 10 year life in the, in the, in the, in the, in securities book.

And interest rates were zero. Like they couldn't go, they only can go one way. So why aren't we protecting against upside? And then, you know, a Fed chairman comes out and says, we're going to start raising rates. He gave us a three month head start before he actually started. And no one did anything about it. I mean, the impact was clear. It's just math. And I just didn't understand why we couldn't hedge some. I mean, some guys did.

But most didn't. I mean, FRC CEO is famous for beginning to 23 saying, you know, somebody asked him about the interest rate risk on the balance sheet. He said, we don't hedge risk. We don't hedge interest rate risk. Okay. You know, then fail. I mean, seriously, it got kind of stupid at that point, but the impact was kind of upsetting to us. I mean, we sit with banks like, yeah, we're going to get that back over six years. I have investors that need money, you know, need to see returns now. You know, you just took 25% of my tangible book away in tangible capital.

I have a problem with that. So plus these stocks got more expensive because book got hit. You know, you think you own a bank at 125 a book and then they report over a couple of quarters. That's 150 books. Stock hasn't moved. Well, stocks can go down from there. So we saw that as an issue. We put all five banks in 2023 to zero and we were early on all of them. We were short Silicon Valley from. Say that again. So in 2023, we put all five banks that went to zero to zero.

We all have a little bit different kind of stories, but FRC, Silicon Valley, I mean, we shot Silicon Valley from $749. I mean, we didn't think it was going to fail at that point, but we saw some issues with Silicon Valley. Kind of all paths kind of led different ways, but a few had interest rate problems. First Republic, and then Republic First, if you believe that, FRBK. Yeah, yeah.

The CEO was funny because he actually put a press release out that said, you know, I think investors are, you know, compared to First Republic, but we're really Republic first. I'm like, yeah, it doesn't have to do with the $4 billion hole in the balance sheet you have. So they both went to zero. Silvergate was interesting, but we took a really easy stance when the stock was in the 50s, right? They wire money to Alameda, blows the balance sheet up.

CEO goes on TV, talk about everything but that wire. And all he has to do is answer that question. We didn't do the wire, stock's going back to 100. Didn't do the wire, you're going to jail, and it's a fraud. So companies kind of blowing up, investors are calling employees, and he thinks it's the best use of his time to go on a weekly, for a week, like a fireside media tour. I'm like,

All right. And he's sitting there and the only question he won't answer is this one question that it's all that matters. It doesn't matter anything else. But did he do the $8 billion, $9 billion wire from one commingling account to the other, knowing that was illegal? He won't answer that question. So that one, we just we took that stance. And then signature was very similar. We thought we thought we had signature a bunch of different times. You know, when a bank grows like that and totally goes in a different direction.

you know it's it's very concerning i mean the group deposited about 30 percent and maybe eight quarters i mean i don't remember exactly the specifics there but you know we've been around new york commercial banks forever and when signature just caused to take a different path uh and go straight into crypto with that was an issue

And then when C are resigned and things were kind of blowing up, it was fairly obvious that this thing was going to go to the least. You know, so those are the five that we put to zero. It was interesting first quarter of 23. I think the carry was down 40 and we were up somewhere around 30 or 40. It was a, it was a wild, it was kind of like the wild west. And then, you know, 24 was a kind of a good year for banks and not great, but, you know, we kind of led, led with a couple of,

larger positions that did really well. We had a few mergers come out of the portfolio. And then we, again, second year, third year in a row, we made money on the short side of banks as well. It was, 24 was pretty good, but I think 25 set up pretty good for, you know, if you invest in kind of small community banks, most of them are trading under book. We don't really like kind of the setup on the overall market, but we think any type of pullback. By overall market, you mean S&P or overall financials?

S&P. I think S&P is, you know, and I also think kind of the political aspect of the market is interesting, right? There's this euphoric move because we have a change in, you know, kind of regime and policy. Everyone is thinking that everything's going to be great. It's kind of the breadth of the market and breadth of kind of the economy. I don't know. It just seems like

And we started selling our banks in July after he got shot. So he takes an 80-20 lead in the polls, and the banks absolutely rip out of the building. And there's this euphoric move. You think the polls in November and October are going to be 80-20? So we thought we faded that move. And I just think that the setup here for him is –

is difficult one for to achieve everything that we think that he's going to be able to achieve and then two just where the S&P is how narrow the win the gainers versus clients last year are on the S&P it was like the narrowest ever you know everyone's kind of bulled up in a few names one today obviously they're coming out of pretty hard in NVIDIA you know we just think the overall S&P is a tough setup here yeah as we record the

The meltdown continues. So Brad, I didn't know that you shorted all five of the banks that failed in 2023 or the big ones, Silicon Valley Bank, Silvergate, Signature, First Republic, and then Republic First. Was it just the rapid deposit growth as well as the huge amount of interest rate risk? Because to my knowledge, none of those banks failed because

Because of credit risk. I don't know about Republic First or Signature, but they failed because they just bought tons of stuff at $100 that went to $80 because the Fed raised rates, right? I mean, Signature, let's just take Signature and Silvergate. Those are just crypto plays and they were just a mess. So the other three, yeah, I mean, you know what? You know how hard it is? I mean, you really have to be really talented to

to fail a bank without any credit losses. I mean, seriously, you have to be talented to do that because it's very hard to do. I'm not quite sure that's happened in history where there was no credit losses to fuel this. I mean, they just basically vaporized their balance sheets and their capital. I mean, when FRC failed, no one wanted to talk about it, but I mean, they had a 15 billion negative capital statements.

Yeah, because of all the securities, they lost all the money on, they bought the securities when, they bought the 10-year when the 10-year was at 1.5% and $100, and the 10-year went to 5% or 4.8%, and it went to $85, and that lost them a lot of money. And the FRC is First Republic. I lost money, Brad, I told you this, but I lost money buying First Republic preferred shares, which got paid out at zero. Yeah, yeah, it didn't matter. I mean, it was, yeah, that was a mess. Yeah, interest rate risk is crazy.

But, you know, listen, the Fed wasn't quick to start cutting rates, right? I mean, they raised 50 basis points in the midst of, you know, the March of when the First Republic was failing. It was kind of an interesting time. The 10-year keeps creeping back up there. That's a problem for the Fed's balance sheet. That's also a problem for banks' balance sheets.

Yeah. If the Fed was a commercial bank, it would be a problem for the Fed. Feds had tons of interest rate risk. Their balance sheet looks a lot like Silicon Valley Bank, but that's, you know, it's the central bank. They're not going to have any problems. They'll just buy more. Brad, so you're bullish on the setup now for commercial banks, for like smaller, you're bullish on what you like and what you're long and you're bearish on what you're short.

What were the big themes in 2024? You said that last year wasn't that good year for banks. I thought it was. I thought the financial sector was up like 30%. Larger banks were the care. I think the Carex index was up eight or nine. Oh, wow. So the last three years, I think the Carex is down about nine. The Russell is kind of flattish, you know, and the fund was up almost 80 net. It's, you know, the banks had an okay year at the end of the year. Yeah. But they were down for most of the year.

Yes, the smaller banks didn't have that much good of a year. I think if you overlay the XLF and the KRX, I mean, the XLF has severely outperformed the last three years. I mean, these things have been left for dead. And then you saw it's kind of a move in the larger regionals. I mean, but some of the valuations like on regions and truists, I mean, they just don't make any sense to us. When you look at our short portfolio, I mean, a lot of them have commercial office REITs.

There's some West Coast office REITs, which happened to happen in the portfolio prior to the fires in LA. We have an LA office REIT in the portfolio. On the short side, there are a few eclectic banks that we, or payments companies, or I think we should have subprime auto lender, stuff like that. It's event by event. One thing we don't do in our portfolio is

We don't just put hedging on as in terms of, "Oh, we're long State Street, so let's short some back in New York." That's how we do. I like that. Everything has-- we are in the weeds. Everything has a fundamental reason for why we're there. So let's talk about the long side first. What's your biggest holding and why? So the biggest holding for the last 5 years has been GBank. There's GBFH.

I raised capital for these guys at the end of 19. I was sitting at Bennington Scattergood. We raised about $20 million for them. Honestly, I didn't really even understand or like the story when I first heard it. And just taking my trader to dinner, he's like, are you doing any of this G-Bank? I'm like, no. I don't really understand. It's a Las Vegas bank. There's some payments and patents, blah, blah, blah. And he said, you got to take a look at this thing. So I called him back up. It's kind of right around Christmas.

I just was enamored by the story. So I called a client of mine, a friend of mine, Chuck Rigg. I said, you got to talk to this guy. Why do I need to talk to this guy? Just take 45 minutes. I don't need to invest in a $400 million bank, Brad. I said, take the 45 minutes. So by the time that call was over, he was on a flight to Vegas. He's the largest institutional holder. He was the largest person in that deal. But I called three or four other of my clients. I said, you know, this is something here that's just insane.

Two of them did four nines. So then all of a sudden, the whole thing was raised. I raised the whole thing in four or five days. I think we raised like 18 or 20. I didn't know you raised the capital. Okay, so you've been involved with this for a big deal. So you know this company? Yeah, my mother owns it at $6.15. I mean, yeah, like this is, yeah. So that's why I got to know them very well. At the time, it was a kind of a SBA lender, hotel lender. And they had this debit card.

that was for gambling that you know basically you sign up for the debit card you know at the casino and then you have not just great deposits to fund that card at gbank when they have the way to protect you with the pcs patents which you can look up online cfpb friendly patents for pooled player so let's just say here's a problem right now

if you say jack if you sell your star wars collection on ebay and you leave your money at paypal and paypal gets hacked who's that the money you are right most people don't think that right because you because you're leaving your money at paypal you don't know that that's not uninsured and it's not it's not actually seen sure because paypal probably banks at jp morgan and all that money is in one account bcs patents allow you to break that out

It's individual accounts. That's how they got the Oregon State Lottery, right? They had this big lottery drawings and, you know, like the, you know, kind of like the gaming tables and slot machine stuff is in that Oregon State Lottery. So they needed to figure out a way to track it also to do, you know, BSA, AML, and KYC stuff. Gbank's the only one that could do this. You know, so banks actually would have to license BCS patents to protect deposits here.

Because it breaks it down one more step so that everyone's got $250,000 insurance. So that's one thing that they had. That's what they had at that time. It's totally evolved from there, right? So debit card's gone because the problem was that MasterCard and Visa kept denying like the gambling code. Bank of America didn't want you to do it. So it kind of like pushed them out. So they went to a credit card.

So the credit card now is profitable. There's only 350 cards out there. It was just kind of like a pilot program, but it's already profitable. And the transaction volume is insane. People are actually using, it's all super prime, right? I mean, 770 credit score. And I know that they're pretty strict because a buddy of mine who's a large investor at G-Bank applied for the card. He had a 770 credit score and he got denied once. So there's really no losses in it. And what we're seeing, I guess, the credit card is

These people are using the card as like a marker at the table. So, oh, you know, they know me at Caesars, Mr. Rich was a $10,000 marker. Instead of getting that from the pit boss, you actually just hand your card and they'll put a mark on the card. And the next day people were coming in and paying it off or at the end of the month. So there's really no loss on the portfolio, but the credit cards are already profitable with only 350 cards. So that's one, one way. And then they also have just launched this Sunday contract talked about on the last call, uh,

With Konami for slot machines. So this is an app that are on the slot machines. That also has some marketing value for casinos to have on there. One thing about casinos, I didn't know this, but it's kind of prehistoric. Technology is totally prehistoric. And the one thing they couldn't figure out is they can't track the user or the player once he steps off the casino floor.

So the Apple can kind of, because you have a G bank card, you put your card in as Mr. Richler and you have $250 left in credit. Would you like to upload that now? Yes. I make 500. I, you know, I make $500 in the slots.

immediately goes back into my G-Bank car and I can walk over to the ATM and take it out. It's, you know, everyone says it's instant. It's not instant. Theirs is instant. You can get up and go take it right out. On top of that, you know, the screen will say, Mr. Ritchie, you've been here for an hour. Can we buy you, you know,

lunch over here at our at any you know dining center in in the casinos they can keep you inside so it's a different way you know for casino for marketing purposes can track kind of where people go no one knows where you where they go to dinner you know you leave the blotcher where do you go you walk in strip so you can you can kind of keep some of that in-house which is great for the casino as well so they have the slot machine app that now konami

Now, what does that entail? It is like 400,000 slot machines in the U.S. They have about 130,000, I think. So they're about a third. And every thousand slot machines is like 2.5 million in non-interest-bearing deposits. So you can do the math on that, right? How many non-interest-bearing deposits? I mean, there'll be so many, so much non-interest-bearing deposits that actually lend deposits out to other banks at probably plus 30.

I don't really know another bank that can grow not just during deposits like that. Also, they're not lending them out. So I can see them making a significant earnings for share just on lending deposits out they can't use, which is we just talked about the deposit problem. These guys don't have that problem. So that's another aspect of this as well. I mean, it's been great. I mean, they raised capital again this year. We were part of it.

But now they don't need any capital. Companies stated that, you know, they file to register for the SEC kind of, you know, first of the year this year and upload in March to NASDAQ, upgrade to the NASDAQ in March. So they'll be eligible for the Russell. I mean, there's 14 million shares outstanding. Management owns about half of that.

you know, it's pretty tightly held for another 20, 25%. You know, Russell Fund is going to need to buy one to 1.3 million shares. And then maybe, you know, four or 5 million shares out there kind of in public hands, you know, I mean, there's some institutions that I guess could sell, but it's gonna be real hard to find some stock there for the Russell guys, which is going to be kind of interesting to watch the stock price here. But overall, I mean, I think that they can earn,

somewhere between I mean conservatively I think they're gonna earn somewhere around two and a quarter 250 this year I think that'll double next year and probably double the year after they've been doubling earnings every year and there's a chance here for that my number looks absolutely stupid at the end of this year or next year where you know 250 is higher than that and I don't know what you put on it I mean if you look at kind of the competitors of that whether it's cash or I mean

Any type of payments or FinTech. Yeah, yeah. Cash or CCB. I think CCB is probably the best. I think CCB and GBank will be the two leaders in FinTech banks. And I think that from where these stocks are trading right now, in two or three years, I think they're absolutely, I mean, they're the NVIDIAs to bank. I think so. Okay. I'm confident on CNCB. I'm very, very, very confident on GBank.

So I think you can put 35 times on it. Let's just put 25 times on it. You know, you have a $75, $80 stock this year. Starts around 26 earnings for G Bank. Kind of ended this year, maybe, you know, third, fourth quarter. I think $4 next year is, you know, very, very easily achievable. I mean, that gives you $125. I mean, the upside here is huge.

You know, I think nothing like if you have your bank hat on, you won't understand it. That's why a lot of bank funds just passed. I just can't. I don't understand it, Brad. I'm like, OK, just keep watching it. And then I still think the guys live in that box, too. Oh, it's not a thrift conversion. It's got all these other things. We think most fintechs garbage. We've been sure a lot of it, but there's a few real deals. And CCB has it and G Bank has it.

You know, I think I urge people to be on the conference call or just pick up the phone and talk to management because, you know, I mean, Ed's 82. I mean, it's Ed's baby. He looks like he's 60. Yeah, I didn't know he was 82. Yeah. I mean, he still flies a plane. He races sports cars on a track with a helmet on. I mean, you know, works out two hours a day, which is, you know, a lot more than I do. But yeah.

you know, the, the path here is, you know, it's now. Wow. I had no idea this guy at Edward was Edward Niagara was, was 82. Okay. So let's backstop. So you, so you got your mother, mother-in-law in it at six,

We have everyone in it. That's great, Brad. I first heard about the stock when it was at probably about $20. It's now at $39.50. This bank is up a tremendous amount. And as you hinted earlier, you don't lose money by selling banks at 13 forward earnings. Banks, unlike some stocks, like if you bought Nvidia at a 30 price to earnings ratio, it just doubled its revenue despite...

you know, current fears like banks, banks don't grow like that. Banks don't grow like Microsoft. So often, and if they do grow like that, often, often there are problems, but this, so often it makes sense to pare down or sell banks when they rally like crazy, even up 30%. And, you know, GBFH was up last year. It was, I mean, it was up over well over a hundred percent.

So I really don't understand GBank Financial Holdings. And of course, I always urge my audience to not make a financial decision if they don't understand the company. And I definitely do the same. I do know a little bit about some competitors. I didn't know about GBank before, but there's, let's say, four main players in this space. Pathwood Financial, you said earlier, Cash, Coastal, their CCB, and then also the Bancorp.

And now G-Bank Financial Holdings. So I thought that the way that these are banking as a service banks, where basically they, and correct me if what I miss, is they do debit cards and they hold deposits for financial companies.

FinTech companies that are not banks. So the derogatory for these is kind of rent a bank. So you have a deposit, what you think is a deposit with a FinTech company, but it's actually not a deposit. That FinTech company has a deposit at, let's say, Coastal Financial Banking.

group. And they that's an advantage because they say non interest bearing deposit. And every time there's a swipe on the debit card, they get high interchange fees in the Dodd Frank Dodd Frank, it capped debit card fees. This is why credit cards have grown so much way more than debit cards over the past, you know, 1015 years. But there's something called the Durbin amendment, which means that if the total bank is $10 billion, or less in size, the interchange fees on debit cards are not capped.

So that's what I see the two advantages of, like non-interest bearing deposits or ultra cheap deposits. And then you get the payment swiping.

G-Bank Financial Holdings, tell us where does this settle in on those two? You said it has non-interest-bearing deposits. Does it also get interchange fees? And is it making the loans for the credit cards? And then also, just in terms of the results, I haven't seen the growth yet. Like it is a lot in the future, right? Because I looked at the investor deck and I think the interest expense actually went up, I think. Yeah.

yeah i mean so the credit card is just turning profitable now so it's been dragged last year first of all as in terms of competitors so the three so the banking as a service is interesting right because those are fdic banks that you all listed first of all i don't think there's really a competitor to gbank because it's not on the gambling side secondly when it comes to banking as a service which is i'll give you the evolved situation evolved bank failed because it's a you know it was it had a i guess cyber attack

had a breach and deposit flight. But that's a true banking as a service, right? They hosted all these fintechs, all the fintechs had their money there. Some of them actually failed the fintechs because they just lost all their money that was deposited at Evolve Bank. Yeah. I'll just tell you right now, if Evolve was licensing G-Bank's BCSs, that would have never happened. That would have prevented that. And the CFPB understands that. It protects consumers. It also protects that. So those are the banking as a service services.

Payments companies that I just, we're very skeptical of. The three others that you mentioned, those FDIC insured banks, those are regulated. Obviously, those are different than kind of what some of these fintechs are saying, they're banking in service. I mean, we like all of them. We don't own TBBK at this point. The Bancorp, we did. And we like the guys at Meta.

or csh yeah um we just we just really never the evaluation never got got us into the stocks just kind of not the valuation where we want to start and we own cc base you know yeah i mean those four guys are kind of the only guys that do it really well and i'm thinking if i'm forgetting one i apologize but there are a lot more companies trying to do this that either don't understand it

or the fintech is not there there's going to be a lot more failures than there are success stories i'm quite proud of the forum that you mentioned i think either are or are going to be the the success stories here yeah so full disclosure i own path through financial the ticker is cash

They used to be known as Meta Bank. They sold that license to Meta. Now that I've disclosed my bias, people can understand. But what about Pathwork? You said it was too cheap. I feel like at the time, it was trading at an eight price-to-earnings ratio. I'm looking at Coastal, which I do not own now, but I did own in the past. It has a PE of 28, probably on forward earnings, it's cheaper. And then GBFH, it's price-to-earnings ratio. I mean, you tell me, but I'm sure it's ridiculously high. So

What is it about Pathway Financial? Well, if G-Bank, you know, if I think G-Bank can own $4 next year on forward, stock trades less than 10 times earnings. Coastal is kind of right there where, first of all, stock has had a huge move. We own it. It's not, you know, our cost isn't here. You know, I think Coastal's got this kind of EPS. When someone was throwing out a $6 or $7 number,

26 I think I mean that that's a you know it's pretty good or eight dollar I forgot what it was someone was like if they can get that stock's going to be a double here you know I mean they all have kind of their own little Pathways it's they're all successful businesses I mean really I I do I do think that and if you think fintech's not going away and if you think payments companies I mean they'll probably have to be a lot of consolidation for payments companies

a lot of payments companies want to be banks i mean you know i know there's interest level there i don't know how that would work but you know i think they somehow these guys these things have to be become married and it's either technology companies paying stupid amounts for banks or banks folding in somehow licensing the fintech product but that's going to continue and i think a lot of the oh we call it fintech but it's really like some type of crm product

or just unproven FinTech that banks are chasing. I think those are going to be, you know, some of your problem childs, children. - And so do you expect just a massive growth in G banks, non-interest bearing deposits and interchange fees? Like how are they going to make $4 a share or in next year? - I mean, there's a bunch of, first of all, spreading come on, you know, the gain on sale for SBA is, you know,

At one point it was in the mid-teens and it went all the way down to under three. And now it's kind of back in the five, six, seven range. So that'll grow there. But I mean, we know this for an SBA sale. I mean, slot machines just taking off, credit cards just taking off, all of that.

And they also have state lottery business, which could be significant. They spoke about another state coming on board there. I mean, it's kind of all together. I mean, and again, I think these numbers are fairly conservative. You know, I could see one or two of these things kind of taking off. Again, when we first got involved, it was kind of a here's what the bank's worth, here's what the bank's worth now, nice little bank. Then they have this moonshot of this fintech debit card.

it's kind of one shot on goal like you'll have an okay irr if it just doesn't work but there's this one moonshot shot on goal now there's seven or eight shots on goal that these guys have created with cfpb and the licensing like you know slot machines and credit card and all of that so and a lot of the potential to be an absolute you know serious game changer but even if they kind of just go with the 50 that

they can do as in terms of what this bank actually could achieve. I still think it's 5X up from here or more. I think that the numbers for Gbank are fairly conservative, but the opportunity here, I mean, listen, if I went to sleep right now and you woke me up kind of middle of 26 and said, hey, Gbank's going to earn $10 a share in 27, I'd go back to sleep. I'll also say that, you know,

If PayPal, if you said PayPal just bought Gbank for four or five hundred dollars, you know, this time next year or I mean, you know, I wouldn't be shocked either. I've had it for five years. It's kind of all come together. Some setbacks like debit card, but I'm just at this point, it's it's very exciting. And if anyone doesn't know the story, I urge you to talk to management or listen to the conference calls, you know.

I'm making my popcorn and just watching the show here. You've done very well in the stock. The stock, you know, definitely probably one of, if not the best performing bank stock last year. But Brad, you know, I'm not talking management now. I'm talking to you. Like you've been involved in the name for five years. Like where are the non-interest bearing deposits? Where is all this stuff? Like other than the stock performance, you know? I mean, they are. I mean, the balance sheet's grown, what, 300% in the last three years. So it's growing. I mean, it's growing non-interest bearing deposits. I'm looking forward to seeing the quarter this week.

But as in terms of like with the slot machines, like I said, they just got this thing kind of started. So that should come this year. I think he got it for, I think, $25 million in non-expiry deposits this year, which I think will change. But-

That's my words as in terms of for the just that's just for the slot machines. But you'll see you'll see I mean, you'll see significant balance sheet growth this year and earnings growth. Again, you know, the company should continue to double earnings or somewhere around there. I think that that's very achievable and pretty easily beatable over the next two or three years.

Thanks for telling us about GBank Financial Holdings. What are your other longs other than GBFH and CCB? We have a basket of smaller names. They're all the small community banks that don't really trade very well. Again, CCB is another name that we own. A little thrift conversion that's been really beat up. And FNWB, which is First Northwest, trades like 60% of book.

It's past their three years. Management has not. It's been disappointing. I think the stock, you know, I think tangible looks somewhere around 18 and a half. You know, I think the company has a pretty big buyback, which should be active in the buyback now, but it's not a sexy story, but I think the stock is worth more than book in a sale. I think actually they're turning it around a little bit. It wasn't a little bit of credit, but yeah,

just mismanagement and talking about fintech failing i mean they've chased a couple of shiny object fintech things that just didn't work out or losses for for shareholders so oh really what did what did at first i've never heard of first northwest bank or but what what did they chase in terms of when was shiny object in terms of trying to be banking as a service or what no it was it was it was like a tech mortgage

you know business line which is kind of more like a crm product again evaluation was stupid it didn't it's just i didn't think it was going to work and it didn't work and it was basically a donation which took the stock from 24 25 to 10 along with a few credit blips which you know they got past like i said you know i think the company now if you don't own it it's either

one they're gonna buy back stock two I don't see any risk to the balance sheet but it's you know they're either going to turn it around right now the stock's going to work are they going to sell the bank and the stock's going to work and management knows that you know I think other investors have been pretty frank with them that you know hey just see the works now we're we've arrived here it's like this you're going to turn this thing around now or are you going to sell it because it's they're at they're out of avenues here I mean the management's had

plenty of time and plenty of chances to get this right. And, you know, it just happens to be that the stock has kind of arrived where I think there's a bunch of different ways that you'll win here. And I don't really see much downside. And when you say there's not that much avenues, you mean the management is going to leave if they don't sell it or fix it?

and then the manager won't sell it won't leave and then you know it'll i mean in my opinion there's just two options either the manager performs here and i'm talking about now yeah yeah looking for the fourth quarter number it better be on the right side of par or you know you know and i'd give maybe one or two more quarters here but i think they'll be there there'll be there are there's some significant pressure on them to perform

And again, you know, we've done well up in the Pacific Northwest. You know, last year we sold FFNW. We actually bought it late in the fourth quarter of 23. And in January, sold to a credit union from $23 cash or $23.50 cash. I think we owned it 11 and a half. I mean, similar story. I think the credit union can buy these guys. I think there's plenty of buyers.

a round book or slightly above book for this company again good little company great market mismanaged and that's and the price kind of reflects that so i think you can i think this is this would be if you ever want to own this thing i think this time because i think there's a bunch of different ways you can win and not very many you can lose

And yeah, it is a small bank. And I think a lot of that is not just the company, but it's also the regulatory environment that with the Trump administration, it's going to be far more friendly to bank mergers, whether mainly the FDIC and I guess the OCC as well, and maybe the Federal Reserve. Yeah, I mean, it's been tough. I mean, I'll give you a few examples. We know a few board members of banks that sold last year. And just kind of talking to the process, it's tough.

I mean, if I told you the regulatory environment, regularly we'll walk in and say, you know, your capital to risk weighted assets is too high to raise capital now or sell. Oh, by the way, if you sell to an in-market buyer, expect two to three years regulatory approval. But if you sell to an out-of-market buyer, expect six to nine months. We don't want job loss. We don't want branch closings. First of all, you're sending banks a failure, right? I mean, just if a bank feels like it should sell, it should just sell.

If they don't feel like they have any capital, if stock doesn't warrant capital or management is at the point or a company's culture is at the point where it can't take the next step to become a bigger bank, right? It doesn't have any offer or it doesn't have the currency to buy a bank. It just feels like it needs to partner up.

best thing for that bank to do is partner up and probably the best buyers for that bank is an in-market buyer one they know the environment they know the economies it serves there's cost saves and basically you get two smaller banks that you know it's kind of one plus one equals three you get a you get a stronger combined bank than you would a standalone basis

And saying you have to find a, or kind of put a gun to you, and you have to find an out-of-market buyer that doesn't know that, you know, that economy or that footprint or the players in that footprint. It's kind of a, it's a hard task. And currently, you know, deal metrics were lower because there's less cost saves. It's more risk. And then if he did have a merger that was announced, you know, he sat out there in two years with purgatory.

And I can't really figure out a reason why a lot of these deals have closed now or approved and just kind of, you know, CEOs are kind of gagged, but you start wondering if there's a problem and there wasn't a problem. That's just kind of what it was. It was just, they just left these things out there for, first of all, I know what the, they took away all of the power from the regional offices and brought it all to Washington and then just sat on someone's desk in Washington. For the FTC, FDIC. Yeah. Yeah. And it's,

It's just it just made a lot of guys gunshot. I mean, you know, it's just why are we going to do that now? Because the worst thing you can do is to now to deal for both companies and just sits out there, you know, without the closing because it needs the regulatory approval. By the time by the time that closes or gets approved, everyone is fighting. It's worth anything inside the bank that you're buying.

God forbid it breaks, then you have two fractured banks that have cultures. One guy knows, you know, you're working at one, they know that they're selling. The other one was prepared for a merger. So people are leaving and kind of, I'm going to be, you know, it's just cultures are totally messed up. And sometimes for two to three years, it just doesn't work coming out of it. Banks make this announcement, you know, some of them, I mean, only a few, I think, you know, have been wrong or, you know, just tough deals. Like, why would you do that? But

Most of the time, these guys are announcing these deals because it's the right thing to do. I mean, for whatever, the culture fit. But a lot of times, it's the seller just kind of running out of road. And you should never have a bank out there that's out of road that feels like it's trapped because then they become problems. Brad, let's talk about on the short side. You said you've been shorting companies in the office space, mortgage real estate investment trust, companies that make...

commercial real estate loans. Yeah, talk to us about, I guess, let's talk about, let's talk about ABR, Arbor Realty Trust. Why have you been short that name? And how has your thesis evolved? We're short from hire. How has it evolved? I mean, there's a Department of Justice and FBI investigation going on right now.

Kind of what we're concerned about, I guess Big Brother's concerned about that too, but I don't really, I mean, listen, you know, I don't have to explain my thesis. Just look at their investor deck and 98% of their loans are classified. He doesn't like to talk about that, but that's just the truth. I mean, these guys had foreclosures, you know, it's kind of not even cool to have foreclosures right now like it was 10 years ago, but these guys have more foreclosures on, you know,

I mean, I think it's six or seven Houston recently had one in Atlanta. They're just, you know, their, their LTVs are just through the roof. You know, they blow to the balance sheet kind of late, you know, in COVID when asset prices rallied significantly, especially in cities. So I just, you know, commercial real estate evaluations is interesting right now because I love the, the,

the punnet that says, Oh, of course real estate's bottoms here because it hasn't bothered at all. We haven't really seen any asset sales or significant ones, you know, especially city office, you know, some multifamily stuff like that as well, where they have a price on the books. I don't think the bid, if they went to sell some of it,

is where they have a price on the books. That's our feeling. I don't know what the number is for New York City multifamily. Is it appraisal value minus 10? Is it appraisal value minus 20, 30? I mean, some stuff that is sold in a fire sale has been 60 cents on the dollar, 65 cents on the dollar. And I think that's the reason why Auburn's not sold any properties because if they sold a few of them, the whole balance sheet would waterfall. I think it's, you know, I just think the marks on

where they have the more their their assets marked is nowhere near what the actual values of of them and i think the loan to value doesn't give them any any role so i think the ltvs and they foreclose on some properties the ltvs the one the one atlanta was a joke they just they let the million dollars out in atlanta 22 and they foreclosed on it you know

18 months later, 22 months later, saying that LTVs were at least 125. So they just shut it down. And they think that it auctioned off under 10 million a few months ago. So I think there's more like that on that balance sheet, but you don't have to take my word for it, take theirs. No one really wants to talk about it, but 98% of the loans is classified in some way or another. And

And was classified, what does that mean? Like criticized by? Yeah, criticized or, you know, for one reason or another, it's not a past loan. So either LTVs went too high, debt coverage is wrong, asset values come down, whatever that is, that classification, it's not a past loan. It's criticized for one reason or another or it's not performing.

Until they can clean that up, which I don't think they really can, we'll kind of continue our thesis along that path. And Brad, remind us, what does Arbor Realty do? They make loans to commercial real estate, but what kind of loans and then how do they fund themselves? It's Arbor Commercial Mortgage, right? So, I mean, yeah, and they do do some bridge loans with short-term loan to get you from one place to the other, basically bridge, right? Where they went wrong on the commercial real estate side is they made a big bet

After asset prices ripped during COVID, if you look at that balance sheet. And why we like showing some REITs here is we just don't think that the credit culture is the same as banks. So I'll give you a perfect example. One network, New York Community Bank or Flagstar now, right? They have very similar loans on the balance sheet.

and they're underwritten with ltvs at 60 65 fairly conservative and arbor's next door lending them at 80 85. look at all the problems commercial real estate and new york community is having because they were regulated fdic entity and they're i think they're stressed this bank maybe not yet i think they're going to be a stress display doesn't have to deal with any other type of regulatory issue but if you look at the balance sheets

And listen, we've been negative on Flagstar for a very long time. Flagstar's balance sheet is so much more fortress-like than Arbor's.

because it's very similar loans other than the fact that arbor does the sunbelt lending where they've had a lot of foreclosures you know foreclosure in nashville and tech i mean six or seven in texas these are these are inbound occupancy states and they're still scre atlanta i mean that's another one i mean let's start with the new york new york city personal estate where

U-Hauls are flying out of the state, but they're going into the states where Arbor's lending and Arbor's still blowing up those projects. Like I said, that's an interesting one. We continue to kind of bet against management. And again, they also have a Department of Justice and FBI investigation. What's that for? Asset prices and markings. And, you know, there's been a few activist short sellers that have written on it about this.

So I urge people that if you are invested, just probably go read them. And if you're interested in that, I mean, I think that they take, they put a pretty good case out there for that one. And kind of our findings are fairly similar. But again, you know, similar to the FRC story, you know, we try not to get overly emotional about investments, but this one's just math. Yeah.

Let's talk about another company, the ticker, which is SAC8, Sation Capital Corp. It's got a tiny market cap of $60 million. This, I believe, last time we spoke, you were short. And they are also a commercial real estate lender. And it's interesting because you hear so much about this commercial real estate doom loop, but then you look at the big banks or even the regional banks or even small banks, and I'm just not really seeing the carnage that was widely expected by

pundits as well as professional real estate people. But I feel like it is in these tiny sort of tucked away names like Arbor or like Sashim Capital Corp or Sashim Capital Corp that, frankly, I'd never heard of Sashim Capital Corp before we spoke that, oh, I'm like, oh yeah, here's the pain. Here is all of the carnage that had been widely expected. That one is, yeah, they have some problems there. We've been short that for a while. It's a fix and flip in a restructure, which-

You know, we also guys in the fix and flip business for them to be in a restructure was already challenging again. I don't know. It just just look at the losses on the balance sheet and we've seen this before and I just don't think they can survive. They have 7 or 8 baby bonds and preferreds out there that they're paying dividends on.

They basically had a, they're basically burning the furniture to heat the home at this point. They barely got the December funding. The bonds that were coming due paid, managers said it themselves, they have no access to capital in the capital markets. They're blaming capital markets, but capital markets seem to be raising money for anyone and everything. So I'm going to bet against that. They also did a merger with a Connecticut-based fix and flip.

commercial real estate on the balance sheets you know i'd love to ask them about their office loan in the middle of maine that's

It has 10% occupancy and it's on the books for $15 million. And I think it's worth probably a million and a half bucks or $2 million. Yeah, that one, I think, continues to kind of take it along its path of, you know, I just, I don't see how I'm managing to get out of this problem. But, you know, we'll see. That's what makes a market. And then what about NEWT or New Tech One? What do they do? And why are you short?

So, I mean, NewTek's valuation is a little bit crazy. We don't trade in valuations. You know, we, this is a BDC that bought a bank, so they never had to deal with regulators. You know, we, you know, it's interesting. These guys do what they call non-conforming SBA, whether lending or... Administration, yeah.

but it's not conforming so it's not it's not it's not government guaranteed they also split that they have a joint venture an asset manager joint venture can decline any loan on an individual basis so you could see and then if they do decline it newt has to take 100 of that loan on the balance sheet so if they can basically pick and choose the ones that are good and take half

i think if the newton you can take the whole thing you know they are gonna have some credit problems management stated that they're not a credit culture imagine you know there's been some carousel management you know we uh you know we like to bet on on drivers not cars and we just don't think the drivers of that bank is uh you know gonna win the race you know companies stated that yeah we're gonna try and outgrow credit well that usually doesn't work yeah i think that one uh

had some challenges in front of them and i think that you know when they came out as a bank i think they missed ceo's guidance really really bullish which was interesting and they missed i think their first year by 50 or 70 percent their earnings probably 50 i think about 50. you know i think management needs to prove themselves first and i guess we'll see if they can do that

Yeah, it's interesting. SBA, small business, I associate that as government-guaranteed loans, but then non-conforming loans, it's not a government-guaranteed loan. He has a bunch of different nicknames for things that, yeah, it's not conforming. So it is what it is. Yeah, and then I'm just looking through an investor deck of them. They compare themselves to Live Oak Bank Shares, which I believe is the largest SBA lender in America. What do you think about LOB? We don't have a position in LOB.

If I wanted to get into that space, I would do a lot more work on Live Oak.

Yeah. Got it. So when it comes to commercial real estate, do you have any strong views on banks that are really into commercial real estate? I mean, the largest banks in it are JPMorgan, but JPMorgan's commercial real estate loans as a percentage of its total assets is very small. So I'm talking about banks like Wells Fargo or M&T Bank, New York Community Bank, now known as Flagstar. What do you think about banks...

I guess Key Bank as well, Bank of the Ozarks. What do you think about any of these names I talked to? Any strong views? Well, I mean, I have a pretty good strong view on Flagstar. But, you know, Flagstar is kind of a victim of New York City politics, right? I mean, they changed the, you know, the rent stabilized stuff to rent controlled. Now, granted, there's a rule change in 2019.

They knew that when all these loans reset, they weren't that the borrower was not going to be able to pay the bill. And they continued to put loans on balance sheet in front of that. You know, they knew this was coming. That's why they're dealing with those issues. They would be dealing with those issues as well if they didn't grow the book. But they grew the book so significantly that it's not like it just couldn't work. It's not like it may work. It just it couldn't work.

Yet there's other banks in that area, right? I think Stu over at Dime did a lot better job kind of navigating this issue because it was a line in the sand, right? It was inevitable. It boggles my mind that this stuff happens because, okay, here's the rule change. It's not going to change. Here's the impact on balance sheet. Let's do another 25% in between now and then. Who made that decision? I don't know, but-

I wasn't in the boardroom. That one aside, it's kind of like a unique story. We think commercial real estate though, especially city commercial real estate, is challenged here a little bit. It's just how to get things to cash flow is very, very hard. So there's only one way. Either interest rates come down,

then there'll be some transactions or asset price have to come down and there'll be some transactions but you know for me to buy a building right now and get into cash flow at these interest rates it's asset price minus 20 30 40. that's the only way and again this is math right yeah that's why we haven't seen asset prices we haven't seen asset sales

in any type of significance. It's just one office property has a problem. This property is a high value property that sells at $0.90 on a dollar. We've seen those things, those pockets of these things. But for us to really get an understanding that maybe commercial real estate, we're out of the woods in commercial real estate. You have to see some actual puking going on of this stuff at a price, and then we can kind of get a base price. But right now, it's kind of all over the place.

Yes. And what do you think about Bank of the Ozarks? I guess now it's known as Bank OZK. This is a very significant commercial real estate lender. Also, they do what's it called? Construction loans. So unfinished buildings, which in my mind is riskier or should be riskier. They just reported. And again, when I'm talking about this narrative of commercial real estate doom loop that you and I, Brad, have been hearing about for literally three years, I look at Bank OZK, a huge commercial real estate lender that's

And their non-accruals, their non-performing loans, their delinquencies are not significant at all. I think that it is. Would you agree with my characterization or not? It's interesting. So a friend of mine brought me that, brought us to take a look at Bank of the Ozarks, kind of when there's nothing going on around the holidays. I have not looked at Bank of the Ozarks for three, four years. For whatever reason, just again, where the portfolio sets up 20 years, I worked in the Northeast, kind of Pennsylvania, Mid-Atlantic.

So that's probably where our strongest relationships are, our strongest understanding of banks. And then we kind of go across the country, but, you know, I would say the whole country is 100% of our portfolio, 40, 45% is kind of in these six, seven states. But we do like banking the Ozarks. We don't think there's a credit issue there. And we think the stock is very, very cheap. And they put up a great quarter. The stock's been left for dead.

I do think that he's a very good manager. George, he's good. Yeah, yeah. I mean, he was the best during the credit crisis by far. His bank, again, with the size of that bank during 2008, 2010, it's a different bank now, but he knows what he's doing. And I think that he can own the stock here. I do. We don't have a position. That's my fault. We did a lot of the work. We didn't do all of the work.

in front of numbers to have a position. But yeah, I think StockHack does pretty well here. I think that if you bet on banks, I think you bet on the bank of the Ozarks and come out ahead. Interesting. And again, that theme of it's not just does it have commercial real estate risk, it's are they responsible? Do they have a strong credit culture?

are the loans any good? What's the liability structure? That really depends. Okay, Brad, what about two, I would say, poster childs of the 2023 banking crisis that they're too small to be on the front page of the Wall Street Journal and they didn't fail, but in terms of stock performance, price peak to trough, these definitely are, I mean, I'm sure you've heard of both of these. First Foundation, FFWM, as well as HomeStreet at HMST. These banks, basically, I would say they had extremely high,

liability deposit beta where their interest costs just exploded higher as interest rates went up. So they had to pay a lot more in interest expense and then their net interest income went down, their net income went down. Any strong view on these two banks or just your general commentary? I mean, you can get me going on HomeStreet. If you follow me on Twitter. Okay, so both have the same characteristics. We believe that it's very poor management. Mr. Mason's already had a few failed banks in his career, gets another one.

i kind of view it as like a if you're if you get a cruise ship and you sink the cruise ship you only get one boat he's got a few boats at the bottom of the ocean yeah yeah yeah i mean yeah if i if i'm a captain of a boat it sinks i probably shouldn't get another one but he did that was interesting though i mean we've been short that we've been long that we were just long that they had a busted merger i think the challenge of that bank again with interest rate risk is there

but they have they have something on their balance sheet called a Fannie Mae dust license which is there's only 25 of them in the world 27 of them now so you have to buy it's it's worth a at one point when we bought stock it was worth more than the markup company I think they could sell that Fannie Mae dust license D-U-S

Okay. I've never heard of that. Yes. Arbor has one as well, actually. Oh, hey. Only big banks have it, but some of the big banks don't and they want it. First Citizens doesn't have it. Who else doesn't have it? I believe Bank of America doesn't have it. That's interesting. And yeah, First Citizens is literally a hundred times bigger in terms of market cap than Home Street. Bank of America must be thousands of times bigger. Yeah. Home Street doesn't even do any dust licensing because they don't have the capital to do it anymore. But-

They are, they could sell that for a significant, let me get the dust liners right now. Dust liners, so Arbor's one, Capital One, C.V. Vitorello, Citi, Home Street, JLL, J.P. Morgan, Key Bank, M&T, NCB, NC Regions, Wells Fargo. So Truist doesn't have one. So a lot of big banks that don't have these.

and again they're not making any new ones again so it's a multi-family product that fannie mae has it's it's been i mean decades this has been there and they distributed one the only way you can get one is through acquisition so some of these other guys have done that but a lot of large off a lot a lot of large res large res don't have an asset management off this thing home sheet has that as in terms of ffwm we don't have a position in it they did recap the bank

I think the bank will be fine going forward. I just don't see a ton of upside there. Got it. Brad, what are some other bank names where you've got strong views on them? We like some banks in New Jersey here. I think Connect One's interesting. They're getting into Long Island. They bought First National Bank of Long Island, which was probably a storied franchise, and they paid $0.70 on the dollar for it, which is...

Shocking because the stock could have sold three, four years ago at 180 a book. Talking about interest rate problems, those guys did it. I mean, that is, you know, well, that's one of the hottest markets in the country that no one knows about, but there's no community banks left. When I was, you know, when I started in this business, probably was 12 community banks just on Long Island. They've all sold to regionals and Flick was the last one, kind of a dying breed.

connect one's gonna get up to long island i think i think frank will do great there i think that one is very interesting no new jersey is interesting as is provident you know we can't own that because my partner's father is the ceo but we've always bet on tony when we could and tony disclosed a kind of a real large deal is this pvc or pfs pfs pfs and you know i think tony will be you know one of the leaders here in the northeast

They bought a great bank for a very good price. Again, when you talk about mergers being out there and that one sat out there for two and a half years, maybe a little longer. He's finally got it rolled up and we love Lakeland and we love Providence. So them together with Mr. Labazette at the helm, we think that stock's very cheap. But again,

You know, we don't, it's just, that's just my feeling on it. Got it. And do you do any investing long or short in non-bank asset managers, such as the giant alternative asset management or financial companies that are attached to banks that do a lot of asset management as well? We do. We just don't have anything in the portfolio right now, but we'll look at BlackRock. We'll look at Blackstone, Aries, you know, you name it. We'll look at it.

there's been such an inflows of of aum into those those companies that there's been really no reason to look at them a short side i think they'll they'll do their day will come no we monitor them and we'll monitor all financials again 95 what goes in the portfolio on the long side is community banks you know probably under 10 billion with sweet spot under five and then the short side can be

We see the correlation in the absolute guts of these companies, not that they say bank on them. So if commercial office is a problem, right? Banks that have real commercial office problems will have issues. Large parts of the portfolio's office, they'll have issues just like commercial REIT. The only thing is, is I think that the REITs actually don't underwrite as good. This capital structure is not as good. They pay out more in dividends.

and there's less capital on the balance sheet and their ltv is a little different so again we you know so that's kind of where we're at you know the way we view the world and the portfolio kind of runs net long because short side moves around a lot more than it does alongside so it's been it's been great to own really cheap banks you know we'll lose two or three or four year

in M&A. They're buying back stocks. We can always sell stock to the company if we need to. Probably 80% of the portfolio has an active buyback. And then you have a dividend carry on the long side. But like I said, we don't hedge with anything as in terms of ETFs or indexes. We feel like that's kind of a donation. It is. I mean, it just kind of keep going up until they don't, but not going to be there on the short side.

if you think you're gonna time that. - Got it, I'm gonna throw a few names at you. Bank of California, BANC, which acquired PacWest, a huge problem bank from last year, Axos Financial, and Customers Bank Corp, CEBI. - All right, all three have tug of war going on between guys that love them and guys that hate them. So I'll give you that out there. - Which are you? - I'm not involved in any, all three of them. I think Bank of California,

is going to be okay i think okay bank california actually is going to work for an investor the problem with bank california is there's just been so much heavy lifting over the last seven or eight years that the finish line is always kind of there but seems like you're just swimming you know swimming against the tide when that turns i think back california does very well access is interesting it's just kind of a different type of bank it's management has been proven very good but

There's a lot of skeptics there, you know, and similar with what was the other one? Oh, QB, customers bank. Same customers, right? So customers, I mean, there's an inquiry there. Again, there's an investigation going on there. They just put up a huge corner, ripped the shorts. I've had great conversations with Sam, CEO. The issue with Sam was he had to go for his dad and his dad sent some haters. Rightfully, he's made some mistakes.

The problem I have with customers and access, you know, the regulatory environment, regulators live in a box, man. And they just, when you try to do something that's not in that box, the answer is usually no. And they, instead of the regulators really educating themselves and understanding that you have all the systems in place to do this and this is innovative, they just put a roadblocks. Sometimes you're the victim of just the regulatory body that just doesn't understand it.

and getting back to G-Bank, I think Ed and his team has done a fantastic job educating. The other thing about G-Bank is that if you look at the board, I mean, the chairman, CEO of MDRM Hotels is on the board. So there's a lot of people there with some influence to actually get in front of a regulator and talk about what these things that BCS patents do. I mean, that's the, so when you get back to the flip side of that, I just think that the regulatory environment sometimes isn't ready for the innovation that companies like

QB figures out and Axios figures out. Until that changes, there's always that risk that companies come under regulatory order or they have to go in different directions. And we've seen that and it's painful for shareholders. And a lot of times it's not the company's fault. Brad, when it comes to what do you think is going to asset class is going to have the biggest trouble on a bank balance sheet going forward? Is credit cards, is commercial real estate, residential mortgages,

car loans, and then maybe I'm missing a small business loans. I'm missing a few things. But what do you think is going to be the biggest problem child? I guess both on an absolute basis, as well as maybe you could say relative to expectations. So everyone's expect there's be problems in commercial real estate loans. No one expects there's be problems in residential mortgage loans. I mean, I don't. So I guess absolute as well as relative. The resident thing is fine. I think residential is fine. First of all, I have to reiterate too, because I have a feeling that

We could see interest rates come down and long rates just do nothing to go up. So that's what we've been concerned about. That's what you just saw. So we're in an interest rate cutting cycle in the 10-year reps from 385 to 470. So it's, oh, okay. So we have to kind of see that. We are not big on consumer.

a lot of us all we're not big on consumer is the fintechs that got involved in it so we believe that the consumer non-recourse non-guaranteed loan is a ticking time bomb does that include credit cards yeah i mean you know i mean all that type of stuff i mean like stuff from a firm

an upstart something like that in a way just we can't quantify right now is that we know that that's going to be an issue i mean my opinion i think that it's definitely an issue what we don't know is does that bleed into kind of stuff that the banks are doing and what i mean the banks i mean overall populace of the banks most of them are not subprime consumer lenders

or kind of weak consumer lenders but as we saw in you know some kind of subprime prices it kind of bled through that's what we're paying attention to like i said we were short subprime order lender that's done well for us who is that credit exceptions corp oh oh yeah okay and you know but you know a lot a lot of this a lot of this consumer stuff now is very predatory so we kind of

we just don't think that that's just a longstanding business. You know, when guys get eight or nine problem revolving credits out there and a firm's going to lend them, you know, a loan at 36% interest rate. First of all, wish you could talk to that borrower and be like, listen, there's gotta be a better way here, man, because you can't, you obviously don't understand interest rate math, but you can't take that loan out. Plus if that's your,

business model, are we modeling 8% or 10% losses? This job loss economy is a little bit softer. That'll be 20% or 30%, you know, not performing well. I mean, just, I don't like companies that model for 10% losses.

I agree. I also don't like companies that the interest rates that they charge the customers are so high that they don't even report them to investors. You have to do the math to figure it out. No, I know. No, you know, yeah. I mean, you know, we don't think those are viable business models either. Right. They can say it. One thing we've learned, we've learned the easy way and we've learned the hard way and we've learned how to invest is in this type of stuff is.

If there's a fintech that's a credit extension fintech, right? So like a firm, someone that's actually lending money out. If management is from a financial background, they seem to do better than when they're from the tech background. Because tech guys think that, listen, it is very easy. I agree with them. It's very easy to lend money. It's just hard to get it back. Yeah, yeah. And I think finance people are aware that they don't know anything about technology, but tech people think finance is easy.

Oh yeah, no, lending's easy. Oh yeah, well, we have this model. Oh, and you can throw that out when there's clouds in the sky because those losses are 10X and they still run them like tech companies. I mean, a firm gives out, I don't know, six, seven, $800 million a year in gifted stock. Oh, okay. In stock comp, so they're just deluding themselves. So those are the problems. I mean, banks are so cyclical that if you're not making money in good times,

bad times used to get pretty ugly. Right. So the low income consumer, subprime consumer, a lot of that is serviced by the non-bank lenders. You mentioned Upstart, Affirmant and the like. And then at the top end, you have American Express. American Express just reported and their wealthy customers are spending a lot of money and delinquencies and charge-offs are flat to down. So that is no problem. What about in that middle

in terms of credit card consumers who are not ultra, ultra prime, but they're not subprime. I know Capital One just reported. I know that their delinquency is actually year over year are down. I think only one basis point. But do you think that that middle segment will be hit in terms of consumer credit as well? Yeah. I mean, so I think that Capital One Discover Card deal is very interesting. I honestly don't know how that gets through and prove, but

let's assume it does i think that's kind of your middle market customer right i mean that's it like those two those two companies came together and that is one big as long as it's not a structural issue with capital one they should be your kind of bellwether to kind of see you know what that middle market consumer does i i again if it's going to bleed through some you know

Low credit score borrower. That's definitely go through there. Whether it goes through the whole thing, like I said, you know, we'll find out. But I think you're already seeing charge-offs and credit take up a little bit of Capital One. I think that continues. Nothing that I feel is, like, dangerous. But I do think that, listen, I think the consumer is hurting here.

And yeah, American Express can say what they want, but that's, could be used up for travel. It's a big business credit card. Capital One is not, Discover Card is not. So I do think there's challenging environments for the consumer, unless tax issue here in this country gets better.

I don't really think that unemployment is going to get better. So yeah, I think that there are some challenges here. Yeah, that is interesting, Brad, that unemployment is so low and delinquencies are really high for such a low unemployment rate, right? Yeah, the bar was totally levered.

Yeah. I mean, again, one thing that needs to change in this country is financial education as in terms of interest rate and kind of budgeting yourself and all that stuff. I mean, just the leverage. So people have two, three, four houses, and that's where the leverage was last time when mortgage market blew up. The leverage on a consumer is beyond.

the amount of households living paycheck to paycheck is higher than we've ever seen and credit card balances high, savings are at the low and balances are going up. So we've gotten through all of the funny money from COVID that's kind of burned off that masked three years of spending you know

It's just, you know, it's interesting. A buddy of mine that's an investment guy in Australia said, you know, part of your country is you guys don't like hangovers. Like, you guys just take it right to rehab, you know? And he's right. He's right. But the, you know, subprime consumer is going to be wearing, you know, wearing it kind of coming forward here. So why aren't you short Capital One or short more consumer lenders?

We may take a look at them now that there's been this kind of move for Trump, which he is going to be consumer friendly. He's going to be, if his last four years he was there, the biggest tax cuts were for kind of low income earners. There's been this tailwind there. And there's also this tailwind of interest rates coming lower. I'm just not quite sure how much lower they're going to come for that type of borrower, but it's kind of, we'll wait and see.

If we were to get involved in that, it's going to be, we have a strong feeling that credit's going to get a lot worse for these stocks to come down significantly. Something we won't own because we're so concerned over that asset class. But the credit trends have not shown us so far. And so it's not a clear bet for us right now.

And do you think there's going to be a lot of IPOs this year? I mean, and especially given your background as an investment banker, because I didn't know that. I was on the institutional side. And then I also worked with the investment bankers to kind of, you know, banks that have multiple needs, whether it's buybacks or research. So I kind of was conduit there and helped out, you know, kind of raising money, you know, through the institutional base.

IPOs as in terms of banks, no. I mean, there are a few little conversions coming, but until we decide that we're going to start issuing charters for banks again, which we haven't done in a decade, the charters will continue to consolidate. I do believe there'll be significant capital raises and then the M&A should be, I think 2025's M&A, as long as interest rates kind of don't go crazy where it's hard to mark these balance sheets,

I think M&A in 2025 will be more than the whole Biden administration over the last four years. The amount of mergers will be more than the last four years. For banks, can you give me the line you said to me on the phone that 2025 for small banks will be the biggest M&A year in history? Yes. Yeah, I believe that. I believe that. I believe the next 24 months

The consolidation is there. Banks are willing sellers. There are good currencies. There are willing buyers out there. And regulation and regulatory environment is not going to stop that. And I think the small banks would be the biggest one. The other side is we have this phenomenon that credit unions are buying really small banks. They're not buying banks that most of the banks are under a billion in assets. But the banks, we had it last year. We had this first Northwest in Seattle.

Stock was an 11 change. It was probably worth 18, 17 to a bank and a credit union paid 2350 cash. We're seeing a hundred percent upside in some of these credit union deals. Why they do that? I don't know why they overpay and they, I don't know, but they don't have, they just can pay whatever they want. They got to pay a little more because there is a little regulatory risk of getting it closed. But I think that that ships sales. I think that most of these deals, unless there's an actual problem with that one deal will close and they're

we'll reap the benefits of that. We love Pennsylvania. We think Pennsylvania is going to be the hottest M&A state in the country over the next 24 months. There's a lot of little banks that don't know what to do and can't earn their cost of capital, and they're paying out 7%, 8% in dividends. So we think that state's going to be hot. Pennsylvania, New Jersey should be hot as well. As much consolidation has to happen there. California and the Pacific Northwest, three more states that should be hot.

Kind of the southeast, too. You know, you see population growth there. Banks are doing really well there. You see asset growth should be a lot easier down there. Deposit growth should be a lot easier. And, you know, you have some of these out-of-market banks trying to get into North Carolina, South Carolina, Georgia, Florida, and the means for them to do so.

A lot of banks that they could have bought over the last five or 10 years are gone. Your targets are fairly slim in terms of how many there are. So you really like small banks because of the mergers and acquisitions. Brad, thanks so much for coming on Monetary Matters. What are your closing thoughts for the audience? I mean, first of all, thank you for having me. Yeah, no, I think 2025 is going to be an interesting year. And I think that we saw a little bit of it already, but

I think that if for the banks, if there's one more wave down in these small banks and there's a pullback, it would probably come with the overall markets. I think that could be a generational buying opportunity. And we've already, you know, we did that in COVID when they busted in 22, kind of talked about that early 23 after they busted. We bought them there, went on the S&P podcast and did that. I think one more move down and

It could be generational biodegradation. There we go. Brad, people can find you on Twitter at TheBankZar, Z-H-A-R. I'm on Twitter, of course, at JackFarley96. People can find Monetary Matters not just on YouTube, but on Apple Podcasts, Spotify, wherever they get their podcasts. Thanks again, Brad. Thanks, everyone, for listening. Thank you. Thank you. Just close this door.