Golden Glove Capital

06/22/2023

05/01/2023

To date, 3 of the 4 largest bank failures in US History have occurred over the last 8 weeks. Community & Regional Banks serve a vital purpose to our economy by providing personalized services to entrepreneurs of small & medium size businesses. There are still many good Community & Regional banks options out there that need to be supported by clients. However, given numerous macroeconomic challenges, please pay careful attention to the following when evaluating your banking relationship (many specifics that I won’t bore you with but here is simple overview):

*Management Team’s Background. Look for Perspective - Mix of accumulated experience from variety of different roles/companies. Strong Credit Risk & Financial Acumen with growth oriented companies is essential.

*Balance Sheet Diversification. Loan mix, deposit mix, client mix, interest rate risk. Risk needs to be spread out or properly mitigated if material exposure in certain areas exists (equity, profits, free cash flow, cash & other repayment sources, etc).

*P&L, Cash Flow Trajectory. Life Cycle & Profitability (Growing, Stable or Declining), where is money being spent to improve Value Proposition (Fixed assets, Technology, Talent & Experience, Interest expense) and are they investing in themselves are taking out $$ (Dividends & Retained earnings mix).

04/03/2023

When the Fed spiked interest rates from ~0 to ~5% over the past year, it had 3 main effects:
1. Undercut value of bonds, especially long-dated bonds.
2. Made lending more expensive, particularly for large purchases like real estate that have to be financed.
3. Increased government borrowing costs.

These effects are just math and have to play out through the financial system in the following stages:
1. Small/regional bank crisis precipitated by unrealized losses on long-dated bonds.
2. CRE crisis precipitated by credit markets seizing up for new loans and impairment of existing CRE loan portfolios (which are also unrealized losses).
3. Government debt crisis precipitated by spike in debt service costs at federal level, budget deficits at state and local level, and sovereign debt issues at international level.