Moneybeat: The dilemma for regional banks | WORLD
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Moneybeat: The dilemma for regional banks


WORLD Radio - Moneybeat: The dilemma for regional banks

Plus: April’s jobs report, the M-Score explained, and how to approach home loans in the current environment

A Pacific Western Bank branch, as seen on Thursday, May 4, 2023, in Whittier, Calif. Shares of small regional lender PacWest Bank plunged nearly 50% Thursday after the company confirmed reports that it was considering “strategic options” that may include the possible sale of the company. Associated Press Photo/Ashley Landis

MARY REICHARD, HOST: Next up on The World and Everything in It, the Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now. David, good morning!

DAVID BAHNSEN: Well, good morning, Nick, good to be with you.

EICHER: Off the top, David, I’d like your sense of the top story of a pretty busy week. We had the April jobs report, more corporate earnings, the Fed’s 10th consecutive interest-rate increase. A lot to choose from. What rose to the top for you?

BAHNSEN: Yeah, I think it was a pretty action-packed week. And there were two that would stick out. I mean, obviously, the Fed raising rates a quarter point wasn't much of a story, we had known that was coming for several weeks. And the fact that he talked down the idea that they will have to raise again, that he's sort of acknowledging it may be time to pause and look at the effect of the tightening they've already done. So you can kind of leave the Fed out of it for a moment. And I think there are two big stories, the first being the one that was playing out throughout the week about where we stand with the state of regional banks. And we know that over the weekend, and going into Monday, you had the JPMorgan acquisition of the now defunct First Republic Bank, which was really put into action very quickly. And immediately 84 branches in eight states were, all their assets and liabilities were under JPMorgan. And, you know, essentially, that kind of moved on, the equity of First Republic was wiped out, the bondholders are wiped out, the depositors now become, essentially, with JPMorgan. And that moved on, and then it took a couple of days to see but then a heavy degree of short selling, meaning people predicting that the stocks of other regional banks would keep falling. And all of a sudden, you had by Wednesday and Thursday, a real significant drop in a couple other big regional banks, not the size of First Republic, or even Silicon Valley, but significant and PacWest was kind of ground zero, a big Beverly Hills based regional. And then on Friday, all of those rallied way higher. You're in a catch 2 right now, Nick, because the absolute worst thing a regional bank can do is announce that they are raising new equity, or pursuing a deal with another bank. And yet a lot of them probably should raise equity, or do a deal with another bank. And so the catch 22 here, and the kind of unavoidable mess in the situation is that announcing you're doing the right thing becomes the wrong thing, but doing the right thing, is the right thing. And so I do think that there is ongoing tension in the regional banks, but they're not about solvency, I really believe these banks have adequate capital to get through. But if there is a short run, if there is, you know, depositors that withdraw capital, which they're not doing, depositors have absolutely slowed down in terms of withdrawal of deposit base. So at this point, it's just a matter of assets and liabilities and confidence in the market. And that issue with regional banks, whether it starts to kind of slow down and allow things to stabilize and move on, or if we still have more clouds ahead. That's the big story. The second one, though, didn't come till Friday, but it was a big one. And that is first the headline number, that there was something like 280,000 jobs created in April, and you had been expecting about 150,000. So you had this big blowout number. But then they had to downward revise the last two months' job creation by 150,000. And so essentially, you ended up only having 104,000 new jobs created with the new jobs being reported for April minus the revisions from the prior two months. And that ended up being lower than had been expected. So it was a real ambiguous report. Not one I would say was just right, like has some good news and some bad news right down the middle, but just very difficult to know what to make of it because there's seasonal reporting factors. There's just you know, is this data gonna end up having to be revised downward? The unemployment rate is at 3.4% down from 3.6%, that's basically tied for the all time lowest. I think that there continues to be real confusing data. Now the one thing I just want to get out of the way right away is those that will say well is this conspiratorial, is someone fudging the numbers are they lying to us? It's just simply not the case. Revisions go up and revisions go down for all sorts of reasons. There's a lot of complexity in the way this is reported. But my point is for an analyst like myself trying to make forward projections out of backward numbers, when the backward numbers can change to that gravity, it's really difficult. But this jobs report was arguably the first one that was below expectations in six months, even though the headline number was way above expectations. So that was quite something to deal with on Friday. And then the stock market, which had been down about 500 points Wednesday, and Thursday was up 500 points Friday. So this is exactly my prediction of the kind of year we're in: ambiguity, in markets and in the economy, and this week, gave us a microcosm of all of that.

EICHER: David, a question comes from Dan Walker of Santa Ynez, California. He’s a longtime listener and supporter and he appreciates hearing you each week, David. Mr. Walker writes:

“Your recent conversations about earnings season and ESG issues, along with some of the strains in the banking sector reminded me of an article in the WSJ related to an increase in [something called] the M-Score [... an academic theory that searches for manipulation in reporting earnings].” His question is whether this “M-Score” might be pointing to potentially more company failures in the near future. He says, “I wonder if you could discuss your thoughts on this.” So, David, what do you think of the M-Score, useful tool or no?

BAHNSEN: Well, I think the M-Score idea is really pretty silly. It's, there's a professor at Indiana University and two professors at University of Missouri, that just recently published a white paper about it, and perhaps a friend of theirs, or somebody at the Wall Street Journal wrote an article about it. But it isn't a metric I've ever heard of, or anybody, you know, adapts or uses, but it's a very common idea of just kind of blending a number of different accounting metrics, as attempt to try to see if in the future, it's going to be something different. You know, we already have these, we've had them forever, I mean, are earnings declining? well, that's a pretty good indicator of if things are not going well. Are credit spreads, widening? That's probably my favorite meaning is the cost of borrowing money going higher, because defaults are going higher, or because there's fear of defaults going higher. I'm a big believer that economics is the study of human action. And I don't think you get better indicators than things like credit spreads, that tell you what real people with real money are demanding in terms of protecting their own real money. And so there's all sorts of things like that out there. Look, if someone were asking me this question on the basis of how we evaluate individual companies, my firm happens to focus on dividend growth investing. And so we look at the ability of a company to continue growing their dividend. And how do you know that? Well, there, every accounting statement will show you the operating free cash flow. So forget all of this stuff. And that what I think they're calling it the M-Score about combining various elements of goodwill or intangibles or depreciation, you can just look at cash flows and see, it's been a very robust quarter for public companies reporting earnings. They've outperformed expectations, guidance going forward is good, free cash flow is higher. Now, a lot of companies are doing this, because they're charging more money, even though the volumes of their sales are not going higher. But that's not a negative. That's an indication of pricing power. That's a positive for those companies. So yeah, there's always new little accounting ideas, and so forth. And certainly there's professors that want to come up with new innovations or ideas, but the notion that all of a sudden, we're going to come up with a new gimmick to measure profitability in the country. We've had these things for 100 years, the author of Ecclesiastes had this right, there's nothing new under the sun.

EICHER: David, I really enjoy your Monday market beat and your sage guidance on dividend cafe. We are in the market for a new home and curious to get your take on ARMs vs. Fixed rate mortgages. With the predicted high mortgage interest rates but predicted lower rates later this year, are ARMs back in style for short-term (3-5 years) home ownership?”

So David, what do you say?

BAHNSEN: Look, it's very difficult to talk about the type of a loan product and the rates that somebody uses in the abstract or universally, because I believe everyone's situation for borrowing is going to be different. But one thing that is universally true right now is almost anybody who takes a loan this year or took one in the second half of last year is going to be refinancing in a year or two, just simply because they're going to be finding themselves in a position where rates are going to be way lower. And they can save a lot of money by moving into a new loan. And so whether they do a fixed rate, or an adjustable rate is somewhat immaterial now, because by definition, they've done an adjustable rate. They can buy a 30 year fixed right now, but they're gonna be refinancing it into a lower 30 year fixed in a year or two, right? And so I don't think it particularly matters a lot. The bigger issue to me is always not adjustable rate or fixed rate, which is really something has to be answered by the rate environment and the homeowner's intention, a reasonable but never assured probability that they intend to stay in the home for a long time. That makes a big difference. But the far bigger issue to me than adjustable rate versus fixed rate is interest-only versus amortization. And if someone intends to be in the home for a particular period of time, I think the more important issue is that they're amortizing the loan, that there's some form of principle payment being made. Whereas with interest-only loans, by definition, if it's being done, because they can only afford the interest-only portion, they shouldn't be buying the home. And if it's being done, just simply because they don't tend to stay there for a long time, I don't have a problem with that. But people just have to understand they're effectively a renter from the bank who pays property taxes, right, they're not really building an equity owning the home when they're not reducing the amount of debt on it. So I don't like giving the advice universally when it is better suited to each individual situation. But that's the environment we're in now. And it's not an environment we've been in for over 20 years, where I'm very confident anyone taking a new loan, in 22 and 23 will be refinancing their loan in the future. The question is just simply when.

EICHER: All right, if you have a question, you can reach us at

David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. His personal website is His weekly Dividend Cafe is found at

David, thanks, have a great week!

BAHNSEN: Thanks so much, Nick. Good to be with you.

WORLD Radio transcripts are created on a rush deadline. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of WORLD Radio programming is the audio record.


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