Kestrel finished the first quarter with a modest gain, compared with a slight loss for our benchmark Russell 2000® Value Index. As opposed to 2022, when the R2V was the best performing index, so far this year it has been among the worst. However, in both cases, we have outperformed by a significant margin. Investors have been fleeing regional bank stocks, which have a heavy weighting in the R2V index, and seeking safety in large cap tech stocks. There is also general concern about smaller, cyclical companies. Of course, our companies are not immune from fundamental declines as the economy slows, but our belief is that this weakness is largely accounted for at current market prices.

We confess; as much as we focus on risk, a bank run was not on our radar screen. We own two regional banks; Banner Corporation (based in Walla Walla, Washington) and Southside Bancshares (Tyler, Texas). Both are well operated, with minimal non-performing loans and below average exposure to vulnerable big city central business district real estate (this was a risk factor that we had identified). They do have underwater investment portfolios, but we believe that if solid banks like these are subjected to major runs, the federal government would need to take action to prevent loss of confidence in the overall banking system. We will get a better picture of deposit outflows when banks report earnings later this month.

Our financial investments also include three insurance companies; Brighthouse Financial, CNO Financial, and The Hanover Insurance Group. Each of our insurance companies serve different segments of the industry, and their asset base depends on the relatively stable continued flow of premium income. Unlike banks, there is no risk of sudden withdrawals.

Our general working thesis is that sharp market declines in anticipation of a financial apocalypse present buying opportunities. This does not make us bullish on the market right now (as is generally true, we remain agnostic). It is likely that opportunities for our strategy will not be directly within the banking industry, where tightened capital ratios will probably constrain buybacks. More likely, the opportunities will be in areas where there are secondary impacts from the banking crisis. We remain firm believers in a long-term trend favoring value over growth stocks.

                                                                                                                                                Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer