Five Questions With: Michael G. Riley

MICHAEL G. RILEY says he believes that many Rhode Island banks can expect more difficult times ahead. /
MICHAEL G. RILEY says he believes that many Rhode Island banks can expect more difficult times ahead. /

Michael G. Riley is a managing member of Narragansett-based Coastal Management Group LLC, a registered investment adviser. He worked on Wall Street for 25 years before retiring in 2002 and settling in Rhode Island. In 2005, he formed Coastal Management Group with two longtime associates. He is a member of the Providence Society of Financial Analysts.
While Coastal Management has no positions in the locally based, publicly held banks, Riley studies those banks for his personal account. With most local banks releasing their quarterly-earnings this week, Riley was asked five questions about the local banks, from the perspective of a trader.
He wants it made clear: These are his opinions alone, not Coastal Management Group’s or anyone else’s.

PBN: You’ve said that you personally hold short positions on some shares of Rhode Island banks. Is the short position because you think these stocks are still overvalued despite declining prices? Or is it that you believe they are undervalued but there’s more bad news to come that will drive the stock prices down further?
RILEY: I am short Newport Federal and Bank Rhode Island in my own account. I believe these stocks are overvalued on both in an absolute and relative basis. Both banks are required to discuss their earnings and decisions regarding their judgment in providing an accurate picture of their financial health. I can’t imagine that their business is good.

PBN: You’ve mentioned asset quality being important in valuing bank shares. What’s your take on the asset quality of Rhode Island banks?
RILEY: Asset quality – to me this is the most important piece of valuing regional banks. Unfortunately under current accounting regulations, there exists a very drawn out deliberate process used to identify problem loans or assets. … Other financial institutions have had to mark to market things like mortgages and loans, and so far I think you have seen negative results. I simply suspect that in this environment, the assets of all Rhode Island banks are overstated. I also believe the economy is tough and earnings growth will not be in the cards in the near future. I would welcome any effort by any bank to talk about the loans that are on their books as assets. I know the banks’ liabilities are real. I’m just not sure about the loans.

PBN: Are current loan-loss provisions significant enough?
RILEY: There appears to have been no real significant increase in loan-loss provisions for either [BankRI or Newport Federal] in the last two years. I find that to be remarkable. Maybe they have a portfolio of very high quality loans, and they have chosen to ignore the ominous and obvious economic conditions in Rhode Island because those loans are so solid. That is within the power of the bank under current rules. As far as banks in the Northeast, generally I suspect that before the difficult times are over, the economic deterioration will cause several Northeastern banks to substantially increase loan-loss provisions. This will hurt earnings as loan-loss provisions count against income. I have chosen to go long [with] those banks I perceive as either having admitted to problems or very well capitalized banks such as [People’s United Financial Inc.] in Connecticut. As a trader, I view this as a paired trade: long versus short… I could be completely wrong, and the current loan-loss provisions of Northeastern banks will turn out to be adequate and the economy could get better allowing the banks to grow. I just think that’s unlikely.

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PBN: Do you foresee any mergers-and-acquisitions action in the local financial arena in the foreseeable future?
RILEY: I am not in the mergers and acquisition business. Being short a small bank carries with it the risk that it may be acquired. PL Capital [an activist shareholder of BankRI] has mentioned this over and over again regarding Bank of Rhode Island, both in public and in [U.S. Securities and Exchange Commission] filings. I believe the bank itself mentioned they have hired an investment banker to evaluate such possibilities. I am at risk. I simply don’t believe either BARI or NFSB is a compelling acquisition in this environment. The strategy in general deployed by PL capital is very out of date, in my opinion. I am surprised their investors haven’t redeemed.

PBN: Do you think BankRI faces a serious challenge from dissident shareholder PL Capital next year? Or will the results remain the same as the past two years?
RILEY: I don’t know whether the “dissidents” as they are called will be back next year. I can’t see how they could win representation on the board [of directors] with a miniscule 8 percent of the shares. It’s interesting to note that [PL Capital has] virtually stopped buying the stock. Maybe it’s cheaper to spend $150,000 a year stirring up the troops, and in the process create publicity, implying some huge skirmish over incredibly valuable assets.

Coastal Management Group LLC, a Narragansett-based investment consultancy, can be found online at www.CoastalManagementGroupLLC.com.

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