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Vol. IV, No. 23

TOM BROWN’S BANKING WEEKLY: 6/7/19

Financial Services Insights and Intelligence

FIRST WORD: What do you get when you combine a traditional $1.8 billion bank with the rapid growth of online gambling and fintech companies with an entrepreneurial CEO who has an eye on banking fast-growing companies involved with cannabis? You get West Virginia-based MVB Financial and its incredibly interesting CEO, Larry Mazza. 

MVB began operations in 1999; Mazza joined in 2005. Earlier this decade, the company was seeing steady 20% annual growth, but in 2014 its margin collapsed after it had to purchase funds to finance loan growth. At that point, Mazza and CFO Don Robinson adopted a “blue ocean” strategy on raising deposits. The strategy focused on two specialty verticals: title insurance for escrow balances, and fintech companies. Mazza saw several advantages in a fintech focus: the company could use the knowledge it gained from dealing with fintechs to advise bank clients, and could also use that knowledge to improve its own efficiency. In addition, MVB could be the bank for fintechs’ operating accounts and could make some small direct investments in fintech firms. The strategy has shown some early success. At the end of the first quarter, MVB’s total deposits were up 65%, year-on-year. Of the company’s $236 million in non-interest-bearing deposits, $33 million are escrow deposits and $63 million are fintech-related deposits. Mazza told me that total fintech deposits, which were around $100 million at the end of 2018, should exceed $200 million at the end of this year. (It takes around nine months to bring a new fintech on board, he says.)  MVB made its first direct fintech investment in 2016, and in the first quarter recorded a $13.5 million gain on one of its portfolio companies, to bring the total value of its fintech investment portfolio to $17.3 million.

Adding extra spice to MVB’s fintech banking growth story is the fact that more than half the bank’s fintech deposits today come from the hospitality and gaming industry, including two clients, FanDuel and DraftKings, that are the dominant players in mobile sports betting. Sports betting is a $140 billion business that states are steadily in the process of legalizing. The industry’s growth outlook is extremely bright. MVB is at the nexus of it all.

Mazza and I talked about the prospect of MVB entering another rapidly growing market: cannabis banking. Bank regulators have sent mixed signals about how to provide banking services to cannabis companies operating legally under state law. Kudos to Mazza for positioning MVB at the leading edge of what could ultimately be a huge new growth industry for banks.

MVB is going to be a fascinating company to watch in coming years as it moves to put itself at the center of several emerging fast-growing industries. CEO Mazza says about the need to embrace its “blue ocean” strategy, “The fintech tsunami is brewing, and banks are becoming yellow cabs in an Uber world. We must modernize or become irrelevant.”

ORIGINATIONS SET TO RISE?: Good news for mortgage lenders! The number of mortgages outstanding that can be profitably refinanced by borrowers is back up to where it was in 2016:

SUPPLY ON THE RISE: Good news for debt collectors! As delinquencies have ticked higher and balances have ballooned, total delinquent card loans have jumped by two-thirds since 2015:

QUIET, PLEASE: The Fed’s new transparency regarding its policy intentions certainly has worked wonders, hasn’t it? Just seven months ago, recall, the Fed was pointing toward several rate increases in 2019. That was then. Conditions have changed since, though—they always do!—to the point that, with Jerome Powell’s comments this week, there’s now a 70% chance of a rate cut next month, with more to come later on:

Helpful! It’s hard not to get a sense that Fed governors didn’t know what they were talking about in the first place. If that’s so, maybe they should just stop talking.

ON THE TRASH HEAP AT LAST: Along that same line, I applaud the Federal Reserve for this week coming to grips with the obvious and facing the fact that its dot plots are useless, or worse:

HERB SANDLER PASSES: Along with his wife Marion, Herb Sandler, who died on Tuesday, was a true banking visionary. What a career the Sandlers had. In 1963, they acquired a $34 million thrift, Golden West Financial; under their management, Golden West eventually generated average annual earnings per share growth of 20% for 35 years, and had $124 billion in assets when it was sold to Wachovia for $24 billion in 2006. I always loved my meetings with the Sandlers. Herb was gregarious and outgoing and a pleasure to talk to. Critics who say the Sandlers had a hand in causing the credit crunch are totally mistaken. Most of the Golden West loan problems that turned up happened after the bank was sold, when Wachovia eased underwriting standards in an effort to justify the high purchase price. In my book the Sandlers were a great American business success story. R.I.P.

ONCE UNTHINKABLE: Golly. The amount of debt outstanding worldwide that carries a negative yield is now $11 trillion.

MONEY BACK: Actually, negative interest rates aren’t just for sovereign and corporate borrowers anymore. Danish bank Nordea is said to be offering a ten-year mortgage at minus-0.12%.

ZIG WHEN THEY’RE ZAGGING: This shouldn’t come as much of a surprise. Strategists at Bank of America Merrill Lynch ran some numbers and found that over the past five years, if you’d bought the stocks in which fund managers were most underweighted in and sold the ones they were most overweight, you’d have done pretty darn well:

The only year the strategy didn’t work was 2017. Not bad, right? These results of course make total sense: all things being equal (and in just about any market there is, now that I think of it), if you buy what everybody else is selling, you’re apt to end up paying an attractive price. Also, it’s easier than keeping the algos tweaked.

ALL WET: The spring growing season doesn’t seem to be off to a great start. Here, for instance, is a soybean field in Nebraska, last year and this year:

One of the big problems has of course been the flooding going on in the Midwest. In any event, you won’t be surprised to learn that farmers’ confidence has been declining:

CHEAPER THAN IT LOOKS: Maybe it really is different this time! Editorialists at Fisher Investments argue that the yield curve’s current state of inversion isn’t necessarily the omen of certain economic doom that the apocalypticists insist that it is, since a) The curve isn’t really inverted yet. With only twelve basis points separating the three-month and 30-year yields, it’s really more just flattish; b) The global yield curve is still positively sloped, so that banks can fund themselves in non-dollars and earn a positive spread, and c) Even in dollars, banks’ actual cost of funds is much lower than even the Fed’s shortest reference rates, such as fed funds. Have a look:

I mean, I don’t care what the yield curve looks like, how can you not make money if you’re just paying six basis points for your funding? A key reason deposit rates have stayed so low during this round of tightening, I bet, is that the big banks have done such a good job attracting customers by offering super-user-friendly online and mobile consumer banking products that they’re feeling less pressure to compete on price. Disruptive!

THE WRONG DIRECTION: It turns out that unicorns can occasionally get de-unicorned. On Tuesday, Disney announced it has written down its $400 million investment in online publisher Vice Media, which it made four years ago when the company was worth $4 billion, by $353 million.

THE HOTTER, THE BETTER: Who knew? It turns out that global warming is good for you. RealClear Markets columnist Davis Simon writes:

In 2015, the prestigious medical journal The Lancet reported that worldwide, cold kills over 17 times more people than heat. A group of 22 scientists examined over 74 million deaths in the United States, China, Brazil, and ten other countries in 1985-2012. They found that cold caused 7.29% of these deaths, while heat caused only 0.42%. And of these temperature-related deaths, “moderately hot and cold temperatures” caused 88.85% of the deaths, while “extreme” temperatures caused only 11.15%.

A warmer earth thus saves numerous lives worldwide. Saving lives outweighs any harm that global warming might cause. [Emphasis added.]

I haven’t given the matter a whole lot of thought, I must admit, but will say I prefer being warm to being cold.

OMINOUS DIVERGENCE: Look out below? Maybe! It’s not often that oil drops by a lot in price during the same week that gold puts on a big rally, as was the case last week, but when that does occur, Crescat Capital notes, bad things tend to happen to stock prices:

INDUSTRIAL DEMAND EASING?: Along that same line, the gold-to-silver ratio is now as high as it’s been in 25 years:

AVE ATQUE VALE: William Tully Brown, one of the last surviving Navajo code talkers of World War II, died on Monday at the age of 96. R.I.P.

OFF-CAMPUS: Regular readers know that it’s been a mystery to me why the higher-education industry hasn’t been disrupted by the internet to the same extent that, say, the newspaper and taxi industries have. The content of college curricula are essentially commodities, after all, and it’s a lot cheaper and more convenient watching lectures and taking exams at home, online, than it is spending four years doing so on a campus, trudging from class to class all day. Would-be employers don’t mind accepting an accredited online degree as a bona fide credential, either. So why the lingering appeal of spending all that money to actually attend college? It can’t just be the fraternity parties and football games, right? (Right?) Anyway, I was heartened this week to read in Wednesday’s Wall Street Journal that the number of full-time, accredited MBA programs in the U.S. has dropped by 9%, to 1,189 since 2014, while the number of online-only MBA programs has doubled, to 390.

So maybe the disruption of higher ed has finally begun! Business management sure isn’t the only discipline that can be taught effectively online, after all.

THE WRONG WAY?: I’ll bet this doesn’t happen most cycles. As the expansion has proceeded, consumers’ expectations of inflation have gone steadily down rather than up.

Nobody tell Jerome Powell.

EXODUS: Of the country’s largest metro areas, only one, Chicago, has managed to actually lose population over the past ten years:

Why, even Philadelphia is growing! Meanwhile, the Chicago teachers pension fund is just 49% funded, its municipal fund, 28% funded, and police, 24%. Let’s just say this population leakage won’t help:

A DANGEROUS THING: Um, this seems about right:

UNCERTAINTY BEATS REALITY: Bankers I’ve spoken with over the past three weeks tell me economic conditions are strong in their local markets, and that their commercial and retail clients are in solid financial shape. Bankers say that their biggest concern (and their commercial clients’, as well) is where trade policy is headed, and the effect the administration’s moves to restrict trade might have on the economic outlook. If this chart from Cornerstone Macro is right, they seem to have reason to worry:

STUDENT LOAN DEBT: The government’s vaunted student loan forgiveness program, wherein borrowers get some of their debt forgiven in return for taking jobs in the public sector, doesn’t seem to be working so well. Only 1% of those who’ve applied for relief have been approved.

SLOWDOWN, BUT NO RECESSION: New tariffs and uncertainty about future trade policies have surely helped slow the economy, but I agree with Bank of America CEO Brian Moynihan’s comments this week that the bulk of economic indicators lately suggest no recession is looming. The transportation industry, though, does seem to be weakening markedly:

  • The ISI weekly trucking survey, which has the highest correlation to GDP changes of all the firm’s company surveys, has been trending down after a strong end to 2018, and has declined in all but two of the past nine weeks.
  • Orders for consumer-goods-hauling Class-8 trucks fell 52% last month from a year ago, to the lowest level since April 2016.
  • Dry van truckload spot rates fell nearly 19% year-on-year in April.
  • The Cass Freight Index for shipments dropped 3.2% in April, marking the fifth consecutive down month.

Then again, the last time shipping activity slowed by a lot, in 2016, the U.S. and global economies continued to expand.

THERE HAS BEEN A CHANGE: Researcher consultant Civic Science CEO John Dick says that his firm’s data shows that mobile banking has become so widespread that we should stop calling it “mobile banking” and just call it “banking,” instead. He kind of has a point: 

 

THAT WAS FAST: If you thought the slide in the ten-year Treasury’s yield in recent weeks has been especially fast and furious, you’re on to something. According to Bespoke Investment Group, the move, relative to the ten-year’s 50-day average, was three-and-a-half standard deviations, which doesn’t happen often:

UNPROFITABLE RISING: Over 25% of the companies in the Russell 2000 are unprofitable, which, considering where we are in the economic cycle, seems like a lot, no? One reason the number is so high is that so many unprofitable companies have gone public in recent years. As I’ve noted before, that’s a sign that the IPO cycle is getting long in the tooth.

TRULY AMAZING: It’s been an incredible decade for stocks, to the point that by now, many investors are increasingly nervous and are moving into cash. For perspective, the top 1% of U.S. households hold $304 billion in cash today, compared with just $15 billion just before the financial crisis.

NEXT WEEK: Two sentiment-related releases will bear paying attention to. On Tuesday, the National Federation of Independent Business will publish its Small-Business Confidence Index for May. The consensus expectation is 102.8 vs 103.5 in April. Then on Friday, we’ll get the June University of Michigan Consumer Sentiment Index. The consensus looks for 97.0 vs 100.0 in May.

THE LAST WORD: I was struck by all the information, images, and speeches I saw and heard this week related to the 75th anniversary of D-Day. Of course I learned about D-Day in school and have been reminded of its significance each year since, but this year was different. It was special, and really touched me.

  • The magnitude of the operation. The preparation and logistics for the invasion were mind-boggling, particularly given the tools available at the time. The invasion consisted of 160,000 troops, 12,000 aircraft, and 7,000 ships.
  • The images. There were so many images that touched me this week, from the crosses in the cemetery, to the surviving vets who were able to attend, to 97-year-old Tom Rice doing another parachute jump. Then there was this flyover in red, white, and blue:
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  • The speeches by world leaders to mark the anniversary were great, including the speeches by French President Macron and President Trump, but my favorite was given by Queen Elizabeth. “The heroism, courage, and sacrifice of those who lost their lives will never be forgotten,” she said. “It is with humility and pleasure, on behalf of the entire country, indeed the whole free world, that I say to you all, thank you.” Hear! Hear!

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