Author Topic: Bank Stocks  (Read 22123 times)

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3349
  • Age: 37
  • Location: South Carolina
Re: Bank Stocks
« Reply #250 on: October 29, 2019, 12:13:44 PM »
@Buffalo Chip is spot on!

- I believe corporate debt doesn't pay enough of a premium and stick with cash/treasuries

- I'm a big fan of international/emerging markets right now.  The Emerging Market Index trades at 12x earnings while VTSAX sits around 20x.  The constant rise of the dollar should make VTSAX trade higher, but that's a heck of a spread. 

One person I talk to a lot about this is up to 50% international equity as an early retiree.

Buffalo Chip

  • Pencil Stache
  • ****
  • Posts: 793
  • A Very Stupid Personģ️
Re: Bank Stocks
« Reply #251 on: October 29, 2019, 01:31:19 PM »
@Buffalo Chip is spot on!

- I believe corporate debt doesn't pay enough of a premium and stick with cash/treasuries

- I'm a big fan of international/emerging markets right now.  The Emerging Market Index trades at 12x earnings while VTSAX sits around 20x.  The constant rise of the dollar should make VTSAX trade higher, but that's a heck of a spread. 

One person I talk to a lot about this is up to 50% international equity as an early retiree.

Thanks!  Your friend and I are on the same page. Or would be if my $&%! 401k had more expansive options. My play account is much more inline with where I would like my investments to be.

Katmandew

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Bank Stocks
« Reply #252 on: October 29, 2019, 07:38:17 PM »
Thank you both for the sage advice.  I think we have over saved what we will actually ever need.  The fly-in-the-ointment is that half of our 'stache is in a small (but profitable - 11% T.R. over 10 years) community bank.  As long as things don't get to wild-n-wooly, we should enjoy a fairly fat FIRE.  Ideally, I would not have anywhere near 50% in the stock of one company, but it is not very easy to in this particular situation to diversify out of it.

Thank you again.

Buffalo Chip

  • Pencil Stache
  • ****
  • Posts: 793
  • A Very Stupid Personģ️
Re: Bank Stocks
« Reply #253 on: October 30, 2019, 10:20:38 AM »
Thank you both for the sage advice.  I think we have over saved what we will actually ever need.  The fly-in-the-ointment is that half of our 'stache is in a small (but profitable - 11% T.R. over 10 years) community bank.  As long as things don't get to wild-n-wooly, we should enjoy a fairly fat FIRE.  Ideally, I would not have anywhere near 50% in the stock of one company, but it is not very easy to in this particular situation to diversify out of it.

Thank you again.

50%?! Wow.

Iím not a financial advisor and I donít play one on tv. Thatís the sort of thing that would keep me awake at night. You might not be in a position to reduce your exposure, but thatís a proverbial elephant in the living room.

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: Bank Stocks
« Reply #254 on: October 30, 2019, 10:42:21 AM »
- I'm a big fan of international/emerging markets right now.  The Emerging Market Index trades at 12x earnings while VTSAX sits around 20x.  The constant rise of the dollar should make VTSAX trade higher, but that's a heck of a spread. 

Emerging markets seem really risky to me right now.

Emerging markets tend to get really hammered in a recession and pole-axed in anything worse. Their export market (generally USA) dries up and the currency drops, a 1-2 punch that is very hard to counteract. Their governments generally have no method to support the economy, so they just wait it out.

In other words, there's a reason they trade at 12x earnings, i.e. value trap, IMHO.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1704
Re: Bank Stocks
« Reply #255 on: October 30, 2019, 10:48:22 AM »
Thank you both for the sage advice.  I think we have over saved what we will actually ever need.  The fly-in-the-ointment is that half of our 'stache is in a small (but profitable - 11% T.R. over 10 years) community bank.  As long as things don't get to wild-n-wooly, we should enjoy a fairly fat FIRE.  Ideally, I would not have anywhere near 50% in the stock of one company, but it is not very easy to in this particular situation to diversify out of it.

Thank you again.

50%?! Wow.

Iím not a financial advisor and I donít play one on tv. Thatís the sort of thing that would keep me awake at night. You might not be in a position to reduce your exposure, but thatís a proverbial elephant in the living room.

Hereís how you diversify out of it:

Set up a separate account and buy put options betting on the decline of your company. If the stock goes down, your separate account will go up. There will be a floor on your losses. Otherwise you lose 2-4% of the principal value per year as payment for the insurance, which is probably less than the discount you got on the stock.

Katmandew

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Bank Stocks
« Reply #256 on: October 30, 2019, 09:11:09 PM »
ChpBstrd:  I didn't mention that we are privately held.  I am guessing this would prevent me from buying puts?  I do appreciate your thoughts.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3349
  • Age: 37
  • Location: South Carolina
Re: Bank Stocks
« Reply #257 on: October 31, 2019, 04:41:38 AM »
ChpBstrd:  I didn't mention that we are privately held.  I am guessing this would prevent me from buying puts?  I do appreciate your thoughts.

I'm curious how long the process is to sell off some shares - or do the optics look bad as an employee and the company is waiting to sell to someone else?

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1704
Re: Bank Stocks
« Reply #258 on: October 31, 2019, 07:00:24 AM »
ChpBstrd:  I didn't mention that we are privately held.  I am guessing this would prevent me from buying puts?  I do appreciate your thoughts.

Yea, that pretty much torpedos my idea.

Katmandew

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Bank Stocks
« Reply #259 on: October 31, 2019, 07:06:21 PM »
The truth is, I can probably easily find a buyer for my stock but our organization is very close nit and the other owners have been very good and generous to me - and they are my dear friends.  My goal would be to sell my shares to one of them but unfortunately, none are buying at this time.   The bank has historically been above average profitable, and we are sub-S so the stock kicks out a healthy dividend.  With the dividend, we can enjoy (by our standards) a relatively "fat FIRE."  If the bank were to somehow totally tank, we could still FIRE on our other assets, albeit with less travel than we currently anticipate.  But absent some black swan or systemic failure, I can see no realistic event that would cause the bank to fail - we run at 3X the regulatory requirements for capital.

All that said, I would happily sell the stock to an insider for less than book (would like to get at least 90%, but i bought it less than 50%).  As conservative as I am, I'd rather own a little bit of 5,000 or so companies vs. a big slice in one.  My guess is, I will hold the stock until others want to retire and when there is no internal market for their shares, then we will take one of the offers we get to sell out to regional or larger area bank.  That will be a sad day for our community, but I will probably get well over 1X book for my shares at that time.  In the mean time, i keep the other half of my portfolio rather conservative to hedge against my increased risk in the one-stock asset.

I do appreciate this thread and the its posters.

Grafter

  • 5 O'Clock Shadow
  • *
  • Posts: 36
Re: Bank Stocks
« Reply #260 on: October 31, 2019, 08:25:32 PM »
Katmandew - That is quite the pickle, if you want to diversify (as there is really no good way to do so other than selling).  But you do appear to have a good handle on where everything is (current profitability, potential buyers, etc). 

Though, with private stock, there are a number of issues, that you have identified, especially if you are employed by it.  As you may be restricted in who you can sell to (either by agreement as well as Sub S restrictions).  As well as it may send a message that you don't want to send.  I know that you mention that the people that you could sell to, aren't buying at the moment.  Have you attempted to talk to them about wanting to diversify (and reduce your concentrated position; as that generally goes over better than just saying I want to sell out)?  As I'm not sure who the current ownership group is (if it is a family group, all employees, just executives, or something else), or if there is an esop.  I'm familiar with a few such banks in my state, and usually there is a "president's desk list" or interested buyers (if it isn't just a family group).

Though with the industry as it is, if there hasn't been any already, the bank will probably get some offers to purchase it (at some multiple of TBV), as it seems like they just keep consolidating for economies of scale (which is understandable, as due to the technological and regulatory costs).  And if there is only a few owners, and they are getting towards retirement age (in their 60s), most likely the stock is a significant amount of their net worth and they are most likely thinking about how to diversify or liquidate it themselves.  And even if not, there should be some consideration of it (potentially as succession planning).

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3349
  • Age: 37
  • Location: South Carolina
Re: Bank Stocks
« Reply #261 on: November 01, 2019, 05:33:00 AM »
@Katmandew - Fascinating.  I'm a little bit risk adverse on a concentrated position in a small bank, but I was a commercial banker in Metro Atlanta from 2007 through 2013 and every community bank HQd in a county one removed from the city went belly up.

That being said, I doubt that happens again.  I think you have a nice plan together.  I'm wondering if the Bank is that heavy on capital and paying a dividend if they would ever do a tender offer to buy back some shares.

BicycleB

  • Handlebar Stache
  • *****
  • Posts: 1851
  • Location: Live Music Capital of the World
  • Older than the internet, but not wiser... yet
Re: Bank Stocks
« Reply #262 on: November 01, 2019, 02:11:00 PM »
The truth is, I can probably easily find a buyer for my stock but our organization is very close nit and the other owners have been very good and generous to me - and they are my dear friends.  My goal would be to sell my shares to one of them but unfortunately, none are buying at this time.   The bank has historically been above average profitable, and we are sub-S so the stock kicks out a healthy dividend.  With the dividend, we can enjoy (by our standards) a relatively "fat FIRE."  If the bank were to somehow totally tank, we could still FIRE on our other assets, albeit with less travel than we currently anticipate.  But absent some black swan or systemic failure, I can see no realistic event that would cause the bank to fail - we run at 3X the regulatory requirements for capital.

All that said, I would happily sell the stock to an insider for less than book (would like to get at least 90%, but i bought it less than 50%).  As conservative as I am, I'd rather own a little bit of 5,000 or so companies vs. a big slice in one.  My guess is, I will hold the stock until others want to retire and when there is no internal market for their shares, then we will take one of the offers we get to sell out to regional or larger area bank.  That will be a sad day for our community, but I will probably get well over 1X book for my shares at that time.  In the mean time, i keep the other half of my portfolio rather conservative to hedge against my increased risk in the one-stock asset.

I do appreciate this thread and the its posters.

Katmandew, I think your plan makes sense. It's probably what I would do in your shoes too. The relationships are better that way, you got where you are by being who you are, and you'll probably (probably) come out ahead this way anyhow.

Fwiw, of course you wouldn't want to short your own compmay, but are there sector proxies that would make sense to short? I'm just thinking that specific risk re that company can't be eliminated, but sector risk might be hedgable somehow. I don't know exactly how, and @chasesfish would be much better at that anyway.

Probably your "conservative allocation" in the rest of the portfolio is the right medicine. Best of luck.

In the mentime, enjoy your life. Probably not doing that is a bigger risk than anything that remains in your portfolio!

bwall

  • Pencil Stache
  • ****
  • Posts: 668
Re: Bank Stocks
« Reply #263 on: November 01, 2019, 06:00:53 PM »
Fwiw, of course you wouldn't want to short your own compmay, but are there sector proxies that would make sense to short? I'm just thinking that specific risk re that company can't be eliminated, but sector risk might be hedgable somehow. I don't know exactly how, and @chasesfish would be much better at that anyway.

I think the idea of finding sector proxies to hedge against is a great idea. In other words, if your specific community bank is going to get hammered, what other bank is also going to get hammered for the same reason? I would suggest buying puts instead of shorting. Puts expire worthless, shorting can ruin you--even if you're the 94th richest person in the world:
https://www.reuters.com/article/us-merckle-newsmaker-sb/german-billionaire-commits-suicide-after-vw-losses-idUSTRE5055O820090106

Katmandew

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Bank Stocks
« Reply #264 on: November 01, 2019, 09:55:49 PM »
We have had some discussions about using excess capital to buy back shares, but we keep the high capital for a reason - we believe in growing/helping the community and that means we often make loans that other banks will not make.  We also have an ESOP, but we have not purchased shares from outside shareholders for several years in anticipation of a wave of boomers retiring - IOW, we are trying to accumulate cash so that we can "cash out" termed employees. 

I certainly don't want to come across as "scared" to hold the stocks - in fact, I will probably feel a twinge of guilt getting the income distribution checks.
I will give some thought to a sector short (or put), but probably what I will do is take the quarterly dividends and invest them conservatively - right now, that has been into a CD ladder in the bank!  If any of you know a good young banker who wants to work (and make a pretty good living, i should add), please DM me!

Thank you all for the thoughts and ideas.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3349
  • Age: 37
  • Location: South Carolina
Re: Bank Stocks
« Reply #265 on: November 02, 2019, 05:29:15 AM »
Your last comment is the biggest issue community banks are going to face - Too many banks, not enough management talent.

The only asset that moves opposite banks that I can find is long term treasuries.  Instead of a CD ladder, buy some 10yr treasuries when they're above 1.75% and some 30s when they go above 2.2%.  If the economy hits the skids, the treasury will do everything it can to lower short and long term rates.

The comment about capital and community make sense - I've owned Bank of Hawaii for years.  Similar setup, they're a glorified bond with some upside because of how much capital they carry.  Didn't have to cut dividend in the recession.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3349
  • Age: 37
  • Location: South Carolina
Re: Bank Stocks
« Reply #266 on: November 04, 2019, 10:25:53 AM »
Big news today in the banking world.   Iberia and First Horizon are combining.   

More of these need to happen, accretive to the shareholders if they can get this approved quickly. 

Grafter

  • 5 O'Clock Shadow
  • *
  • Posts: 36
Re: Bank Stocks
« Reply #267 on: November 07, 2019, 08:36:26 AM »
Chasefish - I forget, but is there is any particular reason that there is a lack of management talent in the pipeline?  It is some combination of high stress/pressure job, needing to move around (at regional players), management/owners thinking that they would sell out, so that they wouldn't have to deal with succession planning, increased competition from other (and potentially higher paying jobs), etc?

Though in other news, it does seem like most of the big banks have been on a run up this past week (WFC is up about 6% in less than a week, and I know FITB and BAC have had similar gains).

Katmandew - I would be curious about learning more about opportunities for "young bankers."  As I know there are a lot of paths to leadership, but I'm sort of curious on your thoughts on a career in banking and how to approach it.  And if you are in IA, I know a few people that would be interested (are in banking, but potentially would be willing to jump ship to a better opportunity).  Though it is also sort of amazing how profitable some community banks are, as I'm aware of multiple ones in IA that do have some outside investors, and still has pretty consistent ROEs in the mid teens.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1704
Re: Bank Stocks
« Reply #268 on: November 07, 2019, 08:55:08 AM »
Fwiw, of course you wouldn't want to short your own compmay, but are there sector proxies that would make sense to short? I'm just thinking that specific risk re that company can't be eliminated, but sector risk might be hedgable somehow. I don't know exactly how, and @chasesfish would be much better at that anyway.

I think the idea of finding sector proxies to hedge against is a great idea. In other words, if your specific community bank is going to get hammered, what other bank is also going to get hammered for the same reason? I would suggest buying puts instead of shorting. Puts expire worthless, shorting can ruin you--even if you're the 94th richest person in the world:
https://www.reuters.com/article/us-merckle-newsmaker-sb/german-billionaire-commits-suicide-after-vw-losses-idUSTRE5055O820090106

Options are available on XLF for durations up to 2.2 years. With volatility (VIX) as low as it is despite all the leading indicators, now is a great time to buy a hedge. The maximum annualized time decay on an ATM Jan 2022 put option at the 30 strike comes out to 5.4% per year per dollar hedged against any decline. If you could tolerate a decline of, say, 10%, you could buy the 27 strike put at an annualized maximum time decay of 4%. Of course, these markets are efficient so the probability-weighted upside can be trusted to exactly match the marketís expected probability-weighted time decay, for a net expected value near zero.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3349
  • Age: 37
  • Location: South Carolina
Re: Bank Stocks
« Reply #269 on: November 07, 2019, 11:55:37 AM »
@Grafter - The sector was out of favor as an employer twice - Hardly anyone went into the industry from the mid 80s to the mid 90s because of rapid consolidation and lots of layoffs.  We went from a bunch of small banks to the infancy of what today's banks look like.   Salaries fell behind and banks didn't really start adding training programs again until the mid 1990s.   The industry is now coming up on that generation gap with the people who started pre-1985 retiring.

The industry again fell out of favor in the last decade.  The Ivy MBAs went to silicon valley instead of wall street while the average college graduate in sales went into IT sales vs. banking.  Lots of regulatory training and compliance is involved in the job, which doesn't exist in the tech sector.  Some of the best people decided to move to client side advisory work, making the service to businesses more and more of a commodity.

The lack of talent at very high level was one of the reasons I left the industry once I had enough money. 

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3349
  • Age: 37
  • Location: South Carolina
Re: Bank Stocks
« Reply #270 on: November 07, 2019, 11:56:23 AM »
I second the option comment.  KRE might be a better ETF to buy a long dated put on as protection.

Katmandew

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Bank Stocks
« Reply #271 on: November 07, 2019, 08:38:12 PM »
@Grafter I am not in Iowa, but I am in a neighboring state. I stumbled into an a really good opportunity (and my successor will have equal or better opportunities).  I was a young lawyer sitting in my office one day probably wishing I had a bank as a client.  I took a phone call from a head hunter.  The guy wouldn't give up, kept calling me, and finally I agreed to take an all-expense paid trip (okay, i drove, they put me up in a B&B, bought me lunch and maybe paid me mileage, lol) to visit this community bank.
     Once there the managers did a good job of explaining the benefits of being a banker, and sold me on the opportunities of potential ownership (owning capital instead of working for it!).  I started working, did a reasonably good job, inquired about buying stock, bought stock (at a tremendous discount to book), then leveraged that to buy a bunch more stock.  And in there somewhere we converted to a Sub-S bank, which when coupled with an ESOP, is an absolutely incredible combo for building wealth. 
     And my wife (who is the brains of our operation) also had a good job and tanked a bunch into her 401k.  While we lived below our means, we certainly didn't live like paupers.  We live in a LCOL area but have taken amazing vacations over the years.  One day I woke up and asked myself, what the hell are you working for?  You can't take it with you and life is short at best and always uncertain - and as far as I know, there is no do-over.  I am retiring next year at 54, and only stayed this long because I care about my co-workers and customers.  It is a b!tch to attract young people to rural America - they all want the city, and I kind of get that.  But I worked for 24 years and made a helluva living and had fun for the most part doing it.  I just wish I could find a young version of me to take over and keep it going!  Message me if you know anyone willing to consider a rural way of life who has a bit of drive.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3349
  • Age: 37
  • Location: South Carolina
Re: Bank Stocks
« Reply #272 on: November 08, 2019, 03:10:37 AM »
@Katmandew - What a great story!  Funny enough I just opened a stock position in a $75mil market cap bank that a few people I know where I first started my career had.  The discounts aren't what they were, but still neat to buy something for 8% below TBV when the underlying business has a 10-11% ROE.

Did you find the compensation okay for the job or did it build over time?  One thing I was shocked with relative to banking (at least 10 years ago) was just how much lower salaries were in rural areas vs. larger cities.  I wonder if/when some of the smaller market community banks wised up.  The few friends I still have in the business aren't exactly killing it in salaries, seem to get capped out in the low six figures.

RobertFromTX

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: Bank Stocks
« Reply #273 on: November 10, 2019, 10:56:07 AM »
Kinda new here, but I had a similar story to Katmandew. I'm a 35yo mustachian.

Years ago I had the chance to join a growing community bank that was privately held. Also located in a rural area with a talent drought. The opportunity came with stock options and an ESOP/401k. I bought shares outright in my IRA and outright when I joined.  The ESOP obtains a quarterly FMV which helps establish a hypothetical value. But because there's a larger number of shareholders, there's a market (albeit illiquid). The valuation is mostly based on a multiple of tangible book value. Now that the dividend has escalated after growth, it's made for a very nice investment. It is > 50% of my net worth and I'm totally okay with that. I reinvest the dividends in VTSAX/VBTLX.

Katmandew

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Bank Stocks
« Reply #274 on: November 10, 2019, 06:23:36 PM »
@chasesfish - Very little doubt in my mind that I could have pulled down a better base salary at a larger bank.  However, I would have been "pigeon holed" and not give as many opportunities to branch into all of the areas that I did.  Also, while I cannot prove the counter-factual, I believe I grew my wealth quicker because of the stock I acquired both in and out of my ESOP/401K

@Robert - Is your bank also Sub-S?  An ESOP paired with Sub-S stock is almost too good to be true. . . I type that with a bit of trepidation as one day an assistant to an assistant to President Warren will read this and say "hey, I found a new loophole to close." Lol.   My net-worth is also >50% in our closely held stock, and we also have quarterly appraisals.  I am so far ahead in the dividends and appreciation at this point that our stock would really have to fall before I would be out anything.  There is probably a greater chance that we sell to a larger bank down the road and I end up getting 1+/Book than any chance the bank goes to zero.

All things equal, I'd rather be in 5,000 companies and not one, but in the mean time, I feel like I am well compensated for the risk.

RobertFromTX

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: Bank Stocks
« Reply #275 on: November 10, 2019, 09:53:38 PM »
We are not an S-Corp because we have more than 75 (I think that's the limit?) shareholders. The Trump tax cuts really boosted our post-tax earnings though.

I also have to agree that the opportunity was far greater than what I would have found at a big bank. You wear many hats and have to know every aspect of banking.

Our ESOP purchased a large block of shares with credit years ago. So every ESOP contribution is really like purchasing bank stock at a ~43% discount. The contributions go toward paying off the stock loan and shares are released from collateral.  And if you compare the annual dividend to what I actually paid for the stock, we're at about a 10% dividend yield.  So yes, diversifying would probably be the smart decision, but the opportunity to own private bank stock is just too good to pass up.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3349
  • Age: 37
  • Location: South Carolina
Re: Bank Stocks
« Reply #276 on: November 11, 2019, 06:01:43 AM »
Its nice to hear both of your stories.

I was at an inflection point in my career (and extenuating circumstances and other life goals led me to FIRE instead) - I worked two levels down from executive management at a big regional bank, but it was in their largest market and I negotiated well in my last move, so was paid so much that going to a small community bank was a paycut.   If I had wanted to continue to pursue my career though, it would have been the right move for all the experience points you talk about so I could then move to be executive management in a larger community/smaller regional bank.

Katmandew

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Bank Stocks
« Reply #277 on: November 11, 2019, 01:40:08 PM »
@chasesfish - I guess our respective career paths both worked out fine, cause we're both here at MMM and FIRE'd, or damn close to it!  I do agree with you that one of the biggest hurdles of facing rural community banks is management succession.  Its a damn shame too.  That, and the regulators seem hell bent on consolidation as well.

@Robert - I am going to send you a message.  If you don't mind sharing a bit about leveraging the ESOP, I'd like to get more info. 

habaneroNorway

  • Bristles
  • ***
  • Posts: 467