Author Topic: buy bank stocks on the dip  (Read 50678 times)


gary3411

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Re: buy bank stocks on the dip
« Reply #1 on: March 13, 2023, 12:19:10 PM »
I bought Schwab today at $49. They have a unique business model much different from the other traditional banks. They're fixed income assets are under stress, so if they have to sell those they could have some crummy earnings short-term, but I think their brokerage and money management services are strong. Also, their checking accounts offer services and perks still not offered at many other banks, people won't want to give that up.

Stimpy

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Re: buy bank stocks on the dip
« Reply #2 on: March 13, 2023, 12:56:37 PM »
Have to agree, early for that but also... there could be some potential deals if your willing to do the foot work.

I am not, and those banks that DID show up on my last DGI search, were not worth investing in, doubt anything has changed in between then and now.

Never really thought of Schwab as a traditional bank, but might be cause all I see about them is trading stuff...  Though I suppose they are.  (Full disclosure, Already invested in Schwab)

Personally though, unless your looking to do some fun trading..  I'd ignore ANYTHING that says NOW IS THE TIME, and just keep to indexing.  :)

smisk

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Re: buy bank stocks on the dip
« Reply #3 on: March 13, 2023, 01:00:04 PM »
For "fun" I bought $1k in BAC calls. Was up 20% earlier, but now I'm about flat.

catccc

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Re: buy bank stocks on the dip
« Reply #4 on: March 13, 2023, 01:11:15 PM »
I have fun watching people do this, but I'll stick with indexing.  It just takes the guesswork out of it all.  I know, boring!  I like it that way!

chasesfish

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Re: buy bank stocks on the dip
« Reply #5 on: March 13, 2023, 01:59:21 PM »
Former banker and complete bank nerd here...

Learn about Tangible Book Value per share.   Then look to see if the company is hiding any losses to tangible book value inside the Held to Maturities portfolio.  Buy good banks as close to or below tangible book value.   Sell when they are priced well above book value per share.

Your risk in bank stocks is a complete takeover, but also massive dilution.  Pull long term charts on RF and you can see what raising equity in a down round can do.

Personally I bought / added to three community banks at or below book value today that I know well ($ASRV, $PKKW, $SMMF).  I hold BofA, and I added preferred shares of two of the distressed banks (PACW and FRC).   I like the prefereds that were issued at a $25 par value and can be bought below $12/share.   The risk/return seems appropriate.   Bank survives and it returns to a security worth $20-$25/share depending on rates.  Bank fails, I lose my $8-$10/share.   In the meantime, I collected a 10%+ yield even if the common shareholders are gutted.   Bank management tends to choose to protect their jobs via dilution instead of selling.   

Some of the bigger regionals are approaching book value, but not there yet.  Math is math, I see no premium based on their size, it might require a discount to book.   There are good deposit franchises like Synovus and First Horizon that are interesting, but it still carries the dilution risk.  I want to buy at a discount to book for that risk. 

I shorted one bank in Texas currently trading at 4.5x book ($FFIN)
« Last Edit: March 13, 2023, 02:04:17 PM by chasesfish »

bwall

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Re: buy bank stocks on the dip
« Reply #6 on: March 13, 2023, 03:32:45 PM »
Former banker and complete bank nerd here...

Learn about Tangible Book Value per share.   Then look to see if the company is hiding any losses to tangible book value inside the Held to Maturities portfolio.  Buy good banks as close to or below tangible book value.   Sell when they are priced well above book value per share.

Your risk in bank stocks is a complete takeover, but also massive dilution.  Pull long term charts on RF and you can see what raising equity in a down round can do.

Personally I bought / added to three community banks at or below book value today that I know well ($ASRV, $PKKW, $SMMF).  I hold BofA, and I added preferred shares of two of the distressed banks (PACW and FRC).   I like the prefereds that were issued at a $25 par value and can be bought below $12/share.   The risk/return seems appropriate.   Bank survives and it returns to a security worth $20-$25/share depending on rates.  Bank fails, I lose my $8-$10/share.   In the meantime, I collected a 10%+ yield even if the common shareholders are gutted.   Bank management tends to choose to protect their jobs via dilution instead of selling.   

Some of the bigger regionals are approaching book value, but not there yet.  Math is math, I see no premium based on their size, it might require a discount to book.   There are good deposit franchises like Synovus and First Horizon that are interesting, but it still carries the dilution risk.  I want to buy at a discount to book for that risk. 

I shorted one bank in Texas currently trading at 4.5x book ($FFIN)


This is great info. Thank you for posting.

I had an account at First Republic (FRC) for many years. They were an exceptional bank and excelled in customer service and I couldn't imagine them going bust.

On May 8th, their stock traded for $115/share. On Friday the 10th, I was tempted to buy some shares when they dropped 30% for the day and closed at $81 per share. This morning they were trading pre-market at $30/share after receiving a $70b financing window, so I decided to do some homework.

On Feb 10, 2023 they did a 2m share capital raise at around $130/share, for, say, $250m to go into their war chest. Their Tangible Book Value was $13.5 billion on Dec. 31st, 2022. At a share price of $30, the market cap was $5.81b, resulting in a Tangible Book Value of per share of .42 if I did the math correctly.

Their business model is geared towards high net worth individuals and business lending based on cash flow, (IIRC). Just the type of bank that ChpBstrd predicted would be affected on the "SVB Goes Under" thread. And, sure enough, FRC got hammered today.

I did some bottom fishing and got 200 shares of FRC as a short term trade. I plan to hold them for about a week, hopefully they will bounce back around $60 (or so) and I can get a quick double.
Thanks, chasesfish, for the dilution warning. I'm hoping FRC's capital raise in Feb will be sufficient, but it's hard for me to get a feel for how far $250m would go to solving any problems for FRC. It's about 1/8 the size of SVB's failed capital raise and I'm estimating FRC is about 1/8 the size of SVC, but ¯\_(ツ)_/¯


chasesfish

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Re: buy bank stocks on the dip
« Reply #7 on: March 13, 2023, 06:01:03 PM »
FRC is not a bad bet.  They're a good bank, their problem is they went from 90bil to 180bil in assets in three years, at a time with anemic loan demand and alternative options paying 3%.   Everyone is worried their deposit costs will go to 5% and the yield on the loan book won't increase as fast, a classic margin squeeze like the S&Ls

I like the bank.

Great reputation, decent risk management (pre-emptive capital raises), a great deposit franchise other banks would want, and a wealth management business that'll be in demand by others.  My worry is the deposits flee or get priced up so high they have to raise some additional capital.  Great banks can still dilute you for a decade.  However, at half of tangible book it's a great trade.   FRC has actual goodwill for those businesses in addition to book.

gary3411

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Re: buy bank stocks on the dip
« Reply #8 on: March 13, 2023, 07:00:05 PM »
Former banker and complete bank nerd here...

Learn about Tangible Book Value per share.   Then look to see if the company is hiding any losses to tangible book value inside the Held to Maturities portfolio.  Buy good banks as close to or below tangible book value.   Sell when they are priced well above book value per share.

Your risk in bank stocks is a complete takeover, but also massive dilution.  Pull long term charts on RF and you can see what raising equity in a down round can do.

Personally I bought / added to three community banks at or below book value today that I know well ($ASRV, $PKKW, $SMMF).  I hold BofA, and I added preferred shares of two of the distressed banks (PACW and FRC).   I like the prefereds that were issued at a $25 par value and can be bought below $12/share.   The risk/return seems appropriate.   Bank survives and it returns to a security worth $20-$25/share depending on rates.  Bank fails, I lose my $8-$10/share.   In the meantime, I collected a 10%+ yield even if the common shareholders are gutted.   Bank management tends to choose to protect their jobs via dilution instead of selling.   

Some of the bigger regionals are approaching book value, but not there yet.  Math is math, I see no premium based on their size, it might require a discount to book.   There are good deposit franchises like Synovus and First Horizon that are interesting, but it still carries the dilution risk.  I want to buy at a discount to book for that risk. 

I shorted one bank in Texas currently trading at 4.5x book ($FFIN)

The only issue with TBV is I don't believe there is any way to measure the amount of deposit outflows that have occurred since the financial world changed 5 days ago. It seems that what we all already knew-keeping a bunch of cash that you don't need any time soon in a low-yielding bank account is incredibly dumb- it least is my perception, that a significant number of mainstream upper middle class folks have come to that realization this week. Many of them havn't even been an adult long enough to remember the last time earning a significant yield elsewhere was even possible. If those folks meaningfully reduce their ordinary deposits and move them to higher yielding instruments the TBV of many of said banks plummets.

I believe this is the number 1 reason the market is repricing banks today, not because of contagion risk. So, if I'm buying any of these distressed bank, I want to buy one whos depositors have a really really really sticky reason for continuing to hold deposits there.
« Last Edit: March 13, 2023, 07:04:19 PM by gary3411 »

Dancin'Dog

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Re: buy bank stocks on the dip
« Reply #9 on: March 13, 2023, 07:58:38 PM »
Former banker and complete bank nerd here...

Learn about Tangible Book Value per share.   Then look to see if the company is hiding any losses to tangible book value inside the Held to Maturities portfolio.  Buy good banks as close to or below tangible book value.   Sell when they are priced well above book value per share.

Your risk in bank stocks is a complete takeover, but also massive dilution.  Pull long term charts on RF and you can see what raising equity in a down round can do.

Personally I bought / added to three community banks at or below book value today that I know well ($ASRV, $PKKW, $SMMF).  I hold BofA, and I added preferred shares of two of the distressed banks (PACW and FRC).   I like the prefereds that were issued at a $25 par value and can be bought below $12/share.   The risk/return seems appropriate.   Bank survives and it returns to a security worth $20-$25/share depending on rates.  Bank fails, I lose my $8-$10/share.   In the meantime, I collected a 10%+ yield even if the common shareholders are gutted.   Bank management tends to choose to protect their jobs via dilution instead of selling.   

Some of the bigger regionals are approaching book value, but not there yet.  Math is math, I see no premium based on their size, it might require a discount to book.   There are good deposit franchises like Synovus and First Horizon that are interesting, but it still carries the dilution risk.  I want to buy at a discount to book for that risk. 

I shorted one bank in Texas currently trading at 4.5x book ($FFIN)




Have you looked at $COLB?  I see that they just completed a merger with UMPQ.  Both have the top rankings in the US banking sector from a stock ranking site that I subscribe to, Obermatt.com. 

gary3411

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Re: buy bank stocks on the dip
« Reply #10 on: March 13, 2023, 08:27:23 PM »
Oh I totally forgot about the huge headwind of the oncoming regulation that will most likely be brought down on banks. Granted, the details will matter. New regs could possibly make banking more profitable, but I find that scenario pretty unlikely. If anything, I expect new regs to make nearly all small and medium sized banks essentially unprofitable unless publicly subsidized (which at the moment they currently are with the fed lending facility).

chasesfish

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Re: buy bank stocks on the dip
« Reply #11 on: March 14, 2023, 03:56:10 AM »
@gary3411

You are correct, the bank runs hit one bank with a poor deposit franchise and two banks with too much crypto / growth.   The only way to judge deposit quality is figuring out everything you can about the deposit franchise:  Higher % of retail deposits, percentage of transaction deposits, age of bank, number of branches.   SVB had minimal branches and was a newer bank, different risk than a 100yr old bank with 5+ branches for every billion dollars in deposits.   Grandma and grandpa plus a bunch of small businesses just don't care, their deposits are insured.   

The regulation risk is real, primarily forcing a common equity raise when it really isn't needed for some.  The more I research First Republic, the more I like the stock, but I can't risk buying the common because of that dilution risk, so I'll stick with the preferred issuances.

daverobev

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Re: buy bank stocks on the dip
« Reply #12 on: March 14, 2023, 04:36:08 AM »
First Republic have several different prefs, is any one better than another?

Edit - and another question, these are all non-cumulative. So they can just... stop making distributions, for as long as they like (as long as the commons also get no divis)... seems like a much less sure thing. Right?

Edit2 - plugging the current out of hours prices and divis in it seems like they're close, J is tiny? but gives the highest yield.
« Last Edit: March 14, 2023, 04:51:23 AM by daverobev »

bwall

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Re: buy bank stocks on the dip
« Reply #13 on: March 14, 2023, 04:51:38 AM »
The only issue with TBV is I don't believe there is any way to measure the amount of deposit outflows that have occurred since the financial world changed 5 days ago. It seems that what we all already knew-keeping a bunch of cash that you don't need any time soon in a low-yielding bank account is incredibly dumb- it least is my perception, that a significant number of mainstream upper middle class folks have come to that realization this week. Many of them havn't even been an adult long enough to remember the last time earning a significant yield elsewhere was even possible. If those folks meaningfully reduce their ordinary deposits and move them to higher yielding instruments the TBV of many of said banks plummets.

I believe this is the number 1 reason the market is repricing banks today, not because of contagion risk. So, if I'm buying any of these distressed bank, I want to buy one whos depositors have a really really really sticky reason for continuing to hold deposits there.

My understanding of Tangible Book Value is that the deposits are already zeroed out in order to make the calculations. It's the book value of the bank if one were to break it up and put the separate pieces on the auction block (company equity (=assets minus liabilities), real estate, etc) for scrap value, essentially. Goodwill has a resale value of zero and no one's going to pay anything for intellectual property to an entity that's broke, so these two don't count to TBV. However, I'm not an ex-banker and I'd defer in an instant to one who knows:
@chasesfish ; can you confirm the definition of TBV?

GilesMM

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Re: buy bank stocks on the dip
« Reply #14 on: March 14, 2023, 06:25:26 AM »
The banks with stock dips are dipping out of concern they could collapse. In this case, investors could lose it all. So, like a anything, there is risk and reward. You might do great or terrible.

bacchi

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Re: buy bank stocks on the dip
« Reply #15 on: March 14, 2023, 08:27:35 AM »
I bought FRC yesterday. In at 30, out at 45. I suspect it'll increase more but a quick 50% gain is good enough.

mistymoney

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Re: buy bank stocks on the dip
« Reply #16 on: March 14, 2023, 09:26:03 AM »
I bought Schwab today at $49. They have a unique business model much different from the other traditional banks. They're fixed income assets are under stress, so if they have to sell those they could have some crummy earnings short-term, but I think their brokerage and money management services are strong. Also, their checking accounts offer services and perks still not offered at many other banks, people won't want to give that up.

so far - that is looking a very solid play!

chasesfish

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Re: buy bank stocks on the dip
« Reply #17 on: March 14, 2023, 10:32:09 AM »
@bwall Tangible Book Value is

Total Assets
minus Goodwell
Minus Total Liabilities
= Tangible Equity

Divided by number of shares.

The only thing excluded from Tangible Book Value is the Held To Maturity securities portfolio, which is what whacked SVB when the liquidity hit occurred.

I'm not sure what "deposits are zerod out" means, deposits are the largest liability of a bank and included in the calculation.



talltexan

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Re: buy bank stocks on the dip
« Reply #18 on: March 14, 2023, 11:44:56 AM »
Indeed ignoring deposits would be ignoring the mechanism through which a bank run is realized (when those deposits are withdrawn)

Scandium

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Re: buy bank stocks on the dip
« Reply #19 on: March 14, 2023, 01:25:30 PM »
I bought Schwab today at $49. They have a unique business model much different from the other traditional banks. They're fixed income assets are under stress, so if they have to sell those they could have some crummy earnings short-term, but I think their brokerage and money management services are strong. Also, their checking accounts offer services and perks still not offered at many other banks, people won't want to give that up.

so far - that is looking a very solid play!

yeah indeed! I only had 1500 sitting around but got a few SCHW at $50. Good so far, but now I'll have to hold for a year for the LTCG..

ChpBstrd

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Re: buy bank stocks on the dip
« Reply #20 on: March 14, 2023, 10:56:48 PM »
Former banker and complete bank nerd here...

Learn about Tangible Book Value per share.   Then look to see if the company is hiding any losses to tangible book value inside the Held to Maturities portfolio.  Buy good banks as close to or below tangible book value.   Sell when they are priced well above book value per share.

Your risk in bank stocks is a complete takeover, but also massive dilution.  Pull long term charts on RF and you can see what raising equity in a down round can do.

Personally I bought / added to three community banks at or below book value today that I know well ($ASRV, $PKKW, $SMMF).  I hold BofA, and I added preferred shares of two of the distressed banks (PACW and FRC).   I like the prefereds that were issued at a $25 par value and can be bought below $12/share.   The risk/return seems appropriate.   Bank survives and it returns to a security worth $20-$25/share depending on rates.  Bank fails, I lose my $8-$10/share.   In the meantime, I collected a 10%+ yield even if the common shareholders are gutted.   Bank management tends to choose to protect their jobs via dilution instead of selling.   

Some of the bigger regionals are approaching book value, but not there yet.  Math is math, I see no premium based on their size, it might require a discount to book.   There are good deposit franchises like Synovus and First Horizon that are interesting, but it still carries the dilution risk.  I want to buy at a discount to book for that risk. 

I shorted one bank in Texas currently trading at 4.5x book ($FFIN)


This is great info. Thank you for posting.

I had an account at First Republic (FRC) for many years. They were an exceptional bank and excelled in customer service and I couldn't imagine them going bust.

On May 8th, their stock traded for $115/share. On Friday the 10th, I was tempted to buy some shares when they dropped 30% for the day and closed at $81 per share. This morning they were trading pre-market at $30/share after receiving a $70b financing window, so I decided to do some homework.

On Feb 10, 2023 they did a 2m share capital raise at around $130/share, for, say, $250m to go into their war chest. Their Tangible Book Value was $13.5 billion on Dec. 31st, 2022. At a share price of $30, the market cap was $5.81b, resulting in a Tangible Book Value of per share of .42 if I did the math correctly.

Their business model is geared towards high net worth individuals and business lending based on cash flow, (IIRC). Just the type of bank that ChpBstrd predicted would be affected on the "SVB Goes Under" thread. And, sure enough, FRC got hammered today.

I did some bottom fishing and got 200 shares of FRC as a short term trade. I plan to hold them for about a week, hopefully they will bounce back around $60 (or so) and I can get a quick double.
Thanks, chasesfish, for the dilution warning. I'm hoping FRC's capital raise in Feb will be sufficient, but it's hard for me to get a feel for how far $250m would go to solving any problems for FRC. It's about 1/8 the size of SVB's failed capital raise and I'm estimating FRC is about 1/8 the size of SVC, but ¯\_(ツ)_/¯
Interesting question. Some back-of-napkin math and a glance at Yahoo Finance might provide the "an" answer.

On 12/31/2022 FRC held $28B in its "securities and investments / held to maturity" account. Let's assume they were reaching for yield in 2021 and buying 10-year treasuries at 1.62%, the yield in mid-March 2021. Now that bond has an 8-year duration and the prevailing rate for treasuries at that duration is about 3.7%.

Plugging these numbers into a handy bond price calculator reveals that for every $1,000 invested this way the bank now has $857.10, a 14.3% loss. So for every dollar in deposits, they'd hold $0.857 if they liquidated their bonds today.

So what's the unrecognized loss on a $28 billion "held to maturity" portfolio?
$28B x -0.143 =  ~$4B

So their bold and proactive $250M capital raise and dilution only offset 1/16th of FRC's unrecognized bond losses according to these assumptions. It seems doubtful to me that they could keep using this strategy to recapitalize.

@chasesfish can check the validity of my assumption on the typical duration of bank-owned assets. It's only a slightly different picture if they were only buying 5 years' duration in 2021. In that case the bonds would still be down 10% (yield on 5y bond then = 0.83%, yield on 3y bond now = 4.05%). Today's inverted yield curve made playing it safe on duration in 2021 a losing bet too!

The capital raise was the right thing to do, and greatly reduces the odds of a bank run or liquidity problem, but it alone seems insufficient to plug a hole that has been getting bigger and bigger with each rate hike, and which may continue to grow. The key variable to predicting a bank run here seems to be the percentage of assets in excess of FDIC insurance. Those depositors know FRC can't make every depositor whole if the FDIC seizes the bank, and so it's a game of chicken to get out in time.

From the FDIC's point of view, most banks in the US look like this! Hence the new federal lending facility rather than seizing every bank for being undercapitalized.

chasesfish

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Re: buy bank stocks on the dip
« Reply #21 on: March 15, 2023, 04:56:33 AM »
@ChpBstrd

Good summary.  Your math is spot on.  A few other dynamic items to consider in your analysis.

- The duration risk shrinks every month

- This panic is causing low risk bond rates to fall.  If this holds through 3/31, the OCI losses shrink and the banks appear better capitalized  (Other comprehensive income, the line item in the call report)

- The only way these unrealizes losses become realized is in a liquidity run.  The combination of the fed facility and a better deposit base cushion most banks from this (and likely First Republic)

I'd love to see them do a press release and say what percentage of their depositors are insured vs. uninsured.   The thing that's scary about FRC is doubling deposits in three years during the free money for all years of 2020-2021.  How much of those are uninsured?

I think FRC has a valuable deposit and wealth management franchise that PNC / TFC / USB would buy.  There's a price where it makes sense for those banks to raise their own capital and buyout FRC vs. an FDIC failure.   That's why I'm betting on the preferreds.  I want nothing to do with the common, but my bet is FRC survives or is bought vs. an FDIC failure.   

I could be wrong





RobertFromTX

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Re: buy bank stocks on the dip
« Reply #22 on: March 15, 2023, 09:40:22 AM »
@chasesfish Enjoyed reading your blog. I'm a former community banker and your assessments here have been spot on from my experience. Price/TBV was the valuation metric we always considered for evaluating private bank sales.

ChpBstrd

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Re: buy bank stocks on the dip
« Reply #23 on: March 15, 2023, 09:51:54 AM »
@ChpBstrd

Good summary.  Your math is spot on.  A few other dynamic items to consider in your analysis.

- The duration risk shrinks every month

- This panic is causing low risk bond rates to fall.  If this holds through 3/31, the OCI losses shrink and the banks appear better capitalized  (Other comprehensive income, the line item in the call report)

- The only way these unrealizes losses become realized is in a liquidity run.  The combination of the fed facility and a better deposit base cushion most banks from this (and likely First Republic)

I'd love to see them do a press release and say what percentage of their depositors are insured vs. uninsured.   The thing that's scary about FRC is doubling deposits in three years during the free money for all years of 2020-2021.  How much of those are uninsured?

I think FRC has a valuable deposit and wealth management franchise that PNC / TFC / USB would buy.  There's a price where it makes sense for those banks to raise their own capital and buyout FRC vs. an FDIC failure.   That's why I'm betting on the preferreds.  I want nothing to do with the common, but my bet is FRC survives or is bought vs. an FDIC failure.   

I could be wrong
I too would like to see a press release about the % of uninsured assets. There's no rational incentive for a typical family to cash out their checking account, because it's FDIC insured, but mid-to-large size businesses with millions of dollars in payroll/AP accounts insured to 250k are a different story.

The later group is big enough to cause bank runs. It just won't look like a bunch of average joes forming a line. It'll look like a pattern of transfers done online and changes on quarterly reports. These online bank runs won't be publicized or visible to anyone for months, which makes it even scarier. CFOs have to wonder if their banks are already being eviscerated by other CFOs. Some must be thinking about setting aside some funds in treasuries or FDIC-insured hidey holes, just in case.

It seems unlikely to me that FRC's rapid increase in deposits came from a wave of small accounts. More likely, they offered some incentive to businesses and high net worth individuals to obtain those deposits. What kind of incentives? Maybe they went out on the risk/duration curve with their asset base so they could pay higher interest rates or hold fees lower than the competition? If so, that would make their duration risk profile worse than expected at the same time their deposits are more concentrated than average.

I am also interested in bank preferreds, but I think it might be too soon. During the April 2020 panic, preferred stock funds briefly yielded 7.5%. Those are the types of long-duration returns that would support a 4.5% - 5% WR if one could be patient enough and gutsy enough to lock them in. As it turned out, stimulus was announced, bank failures were taken off the table, and preferreds recovered almost completely before the brief recession was over.

The lesson learned was: Wait for the panic, and then lock in returns. The inverted yield curve means we can only do this with risk assets like corporate bonds or preferreds.

We are absolutely NOT at any kind of panic stage at the moment. To see what panic will look like, see what happens to investment grade bond yields versus treasury yields as shown in the graph below. Preferred stock yields will not be far behind these Baa bonds. Even after all the media noise about money fleeing to treasuries, the credit spread right now is actually tamer than in many less risky times. If a recession is on the way, as I think it is, history counsels us to expect the spread to rise at least another 1%. I'll start shopping for preferreds and corporate bonds in earnest when this Baa-treasury spread hits 3 or 3.5%.

In the meantime, I'll be nursing mild paper losses on some OZKAP, now yielding 7.27% and trading for $15.90. That's my price for getting in too soon!


RobertFromTX

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Re: buy bank stocks on the dip
« Reply #24 on: March 15, 2023, 10:46:29 AM »
Bank OZK.. about half their loan portfolio is commercial construction and non-owner occupied real estate. Just drawing from my own experience -- that seems risky, but that has been their business model for at least a decade now.

My preference for a bank's assets is LTD > 75% and mostly primarily focused on Commercial & Industrial lending.
« Last Edit: March 15, 2023, 10:55:04 AM by RobertFromTX »

mistymoney

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Re: buy bank stocks on the dip
« Reply #25 on: March 15, 2023, 11:08:21 AM »
For "fun" I bought $1k in BAC calls. Was up 20% earlier, but now I'm about flat.

Are calls betting for or against the stock?

mistymoney

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Re: buy bank stocks on the dip
« Reply #26 on: March 15, 2023, 11:11:23 AM »
Former banker and complete bank nerd here...

Learn about Tangible Book Value per share.   Then look to see if the company is hiding any losses to tangible book value inside the Held to Maturities portfolio.  Buy good banks as close to or below tangible book value.   Sell when they are priced well above book value per share.

Your risk in bank stocks is a complete takeover, but also massive dilution.  Pull long term charts on RF and you can see what raising equity in a down round can do.

Personally I bought / added to three community banks at or below book value today that I know well ($ASRV, $PKKW, $SMMF).  I hold BofA, and I added preferred shares of two of the distressed banks (PACW and FRC).   I like the prefereds that were issued at a $25 par value and can be bought below $12/share.   The risk/return seems appropriate.   Bank survives and it returns to a security worth $20-$25/share depending on rates.  Bank fails, I lose my $8-$10/share.   In the meantime, I collected a 10%+ yield even if the common shareholders are gutted.   Bank management tends to choose to protect their jobs via dilution instead of selling.   

Some of the bigger regionals are approaching book value, but not there yet.  Math is math, I see no premium based on their size, it might require a discount to book.   There are good deposit franchises like Synovus and First Horizon that are interesting, but it still carries the dilution risk.  I want to buy at a discount to book for that risk. 

I shorted one bank in Texas currently trading at 4.5x book ($FFIN)


This is great info. Thank you for posting.

I had an account at First Republic (FRC) for many years. They were an exceptional bank and excelled in customer service and I couldn't imagine them going bust.

On May 8th, their stock traded for $115/share. On Friday the 10th, I was tempted to buy some shares when they dropped 30% for the day and closed at $81 per share. This morning they were trading pre-market at $30/share after receiving a $70b financing window, so I decided to do some homework.

On Feb 10, 2023 they did a 2m share capital raise at around $130/share, for, say, $250m to go into their war chest. Their Tangible Book Value was $13.5 billion on Dec. 31st, 2022. At a share price of $30, the market cap was $5.81b, resulting in a Tangible Book Value of per share of .42 if I did the math correctly.

Their business model is geared towards high net worth individuals and business lending based on cash flow, (IIRC). Just the type of bank that ChpBstrd predicted would be affected on the "SVB Goes Under" thread. And, sure enough, FRC got hammered today.

I did some bottom fishing and got 200 shares of FRC as a short term trade. I plan to hold them for about a week, hopefully they will bounce back around $60 (or so) and I can get a quick double.
Thanks, chasesfish, for the dilution warning. I'm hoping FRC's capital raise in Feb will be sufficient, but it's hard for me to get a feel for how far $250m would go to solving any problems for FRC. It's about 1/8 the size of SVB's failed capital raise and I'm estimating FRC is about 1/8 the size of SVC, but ¯\_(ツ)_/¯

bold move! good luck!

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Re: buy bank stocks on the dip
« Reply #27 on: March 15, 2023, 11:44:02 AM »
For "fun" I bought $1k in BAC calls. Was up 20% earlier, but now I'm about flat.

Are calls betting for or against the stock?

For.

If you're long a call, you have the option to buy at the strike price.

chasesfish

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Re: buy bank stocks on the dip
« Reply #28 on: March 15, 2023, 12:55:34 PM »
@chasesfish Enjoyed reading your blog. I'm a former community banker and your assessments here have been spot on from my experience. Price/TBV was the valuation metric we always considered for evaluating private bank sales.

Thank you.

P/E means nothing right now.   The banking system is full of 3-4% yielding assets leveraged somewhere between 8:1 and 12:1...and now their incremental cost of leverage is over 5%.   We just have a massive margin squeeze courtesy of a decade of ZIRP.

Time and / or lower rates are the only solution.   Ironically the 10yr treasury backing up so much this week helps fix the issue.

chasesfish

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Re: buy bank stocks on the dip
« Reply #29 on: March 15, 2023, 01:00:44 PM »
First Republic have several different prefs, is any one better than another?

Edit - and another question, these are all non-cumulative. So they can just... stop making distributions, for as long as they like (as long as the commons also get no divis)... seems like a much less sure thing. Right?

Edit2 - plugging the current out of hours prices and divis in it seems like they're close, J is tiny? but gives the highest yield.

Unfortunately you have to go through the issuances one by one.

I chose FRC-N, which is a 4.5% fixed rate preferred on a $25 par.   I own a similar TFC issuance, so I can see the "risk premium" in real time.  Today it's trading for around $8.5 while the TFC issuance is $19.   That's more than a 50% failure priced into the market.  I don't see it, but I could be wrong.

I prefer to buy the lowest fixed payment as possible, which usually equals the lowest price.  Those issuances have the most upside if rates get cut.

mistymoney

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Re: buy bank stocks on the dip
« Reply #30 on: March 15, 2023, 02:07:19 PM »
@chasesfish Enjoyed reading your blog. I'm a former community banker and your assessments here have been spot on from my experience. Price/TBV was the valuation metric we always considered for evaluating private bank sales.

Thank you.

P/E means nothing right now.   The banking system is full of 3-4% yielding assets leveraged somewhere between 8:1 and 12:1...and now their incremental cost of leverage is over 5%.   We just have a massive margin squeeze courtesy of a decade of ZIRP.

Time and / or lower rates are the only solution.   Ironically the 10yr treasury backing up so much this week helps fix the issue.

can you explain what you mean by backing up?

daverobev

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Re: buy bank stocks on the dip
« Reply #31 on: March 15, 2023, 02:37:43 PM »
@chasesfish Enjoyed reading your blog. I'm a former community banker and your assessments here have been spot on from my experience. Price/TBV was the valuation metric we always considered for evaluating private bank sales.

Thank you.

P/E means nothing right now.   The banking system is full of 3-4% yielding assets leveraged somewhere between 8:1 and 12:1...and now their incremental cost of leverage is over 5%.   We just have a massive margin squeeze courtesy of a decade of ZIRP.

Time and / or lower rates are the only solution.   Ironically the 10yr treasury backing up so much this week helps fix the issue.

can you explain what you mean by backing up?

Reversing. IE, over the last (year?), rates have been going up -> bond prices have been dropping. This is the ultimate cause of 'all this' - banks bought long term bonds, the value of which fell as rates went up. This week, because of the flight to safety and the expectation that the Fed won't put up rates/as much means those very bonds have gone back up a bit in price.

Look at the 1 month chart of TLT! https://finance.yahoo.com/quote/TLT?p=TLT&.tsrc=fin-srch

Up ~5%!

chasesfish

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Re: buy bank stocks on the dip
« Reply #32 on: March 15, 2023, 04:35:42 PM »
Correct, "backing up" means rates are falling.

Reminder:  The entire banking system got flooded with deposits in 2020 and 2021.   It was a consequence of three rounds of stimulus, PPP, paused student loans, 3% mortgage refinances (many of which were cash outs), and the savings rate generally going up because of lack of spending.   Cash was intentionally flooded into the economy.

Plenty of banks were mostly 100% loans to deposits before all this happened.

I had the opportunity to talk to a small bank CEO today, he reminded me that his bank was 100% loans to deposits until 2020.   Then deposits grew by 15% overall while lending was flat.   The good news is they didn't have a bunch of securities before this happened, but the bad news is that money had to go somewhere and it went into a bunch of 1.5% to 3% bonds.   That decision cost them 15% or so of their total equity.

The good news is if they don't sell and rates stay flat, 1/60th of that loss is recovered monthly.   If the 5yr treasury closes at a lower rate on 3/31 then it was on 12/31, it helps the bank.    The 5yr closed at exactly 4% on 12/31, today it is 3.563%.   If it holds in that range at quarter end, things look a lot better.  If rates close above 4% at quarter end, bank equity looks worse.

This is the same math all over the industry, some worse, some better based on how they were doing on loans to deposits going into 2020.

nouseforausername

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Re: buy bank stocks on the dip
« Reply #33 on: March 15, 2023, 08:30:13 PM »
@bwall Tangible Book Value is

Total Assets
minus Goodwell
Minus Total Liabilities
= Tangible Equity

Divided by number of shares.

The only thing excluded from Tangible Book Value is the Held To Maturity securities portfolio, which is what whacked SVB when the liquidity hit occurred.

I'm not sure what "deposits are zerod out" means, deposits are the largest liability of a bank and included in the calculation.

By that measure, a micro cap like GLBZ is attractive.

Except it's truly not -- illiquid, slowly dying, ugly chart, no growth prospects.

Wouldn't buying a too big to fail on sale be much more attractive? 

BicycleB

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Re: buy bank stocks on the dip
« Reply #34 on: March 15, 2023, 11:56:35 PM »
Good info, gang!

In Pacnp, fingers crossed.

gary3411

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Re: buy bank stocks on the dip
« Reply #35 on: March 16, 2023, 07:26:14 AM »
Good info, gang!

In Pacnp, fingers crossed.

what is pacnp?

bwall

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Re: buy bank stocks on the dip
« Reply #36 on: March 16, 2023, 08:02:09 AM »
@bwall Tangible Book Value is

Total Assets
minus Goodwell
Minus Total Liabilities
= Tangible Equity

Divided by number of shares.

The only thing excluded from Tangible Book Value is the Held To Maturity securities portfolio, which is what whacked SVB when the liquidity hit occurred.

I'm not sure what "deposits are zerod out" means, deposits are the largest liability of a bank and included in the calculation.

Thanks for your analysis of FRC upthread. It's taken me a day to respond because yesterday I had to get away from the computer. Nothing quite like a bit of market panic to help focus the mind.

I believe I've located the flaw in my thinking, it used to be this: If I deposit $1billion in a bank tomorrow, it's not going to change the TBV of the bank, it's essentially a 'pass-through'. $1billion in assists deposited today offset by $1billion increase in liabilities, so no change in TBV, right? Along the same lines, then therefore, if I withdrew the $1billion the next day, then it also wouldn't change the TBV of the bank. Therefore, any withdrawals won't affect TBV.

However, the difference is time, which I didn't account for in the above thought experiment.

If I deposit $1 billion today then the bank will 'put the money to work' and withdraw it in a year from now, depending on how they've put the money to work they can return the money with either having earned a profit (therefore increasing TBV) or incurred a loss (therefore decreasing TBV). In today's rate-changing environment, the likelihood of a loss is almost guaranteed. Thus, TBV is melting away in these banks that are being run (or runned? What's the passive form of 'run' for a bank?).

bwall

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Re: buy bank stocks on the dip
« Reply #37 on: March 16, 2023, 08:13:46 AM »
This is great info. Thank you for posting.

I had an account at First Republic (FRC) for many years. They were an exceptional bank and excelled in customer service and I couldn't imagine them going bust.

On May 8th, their stock traded for $115/share. On Friday the 10th, I was tempted to buy some shares when they dropped 30% for the day and closed at $81 per share. This morning they were trading pre-market at $30/share after receiving a $70b financing window, so I decided to do some homework.

On Feb 10, 2023 they did a 2m share capital raise at around $130/share, for, say, $250m to go into their war chest. Their Tangible Book Value was $13.5 billion on Dec. 31st, 2022. At a share price of $30, the market cap was $5.81b, resulting in a Tangible Book Value of per share of .42 if I did the math correctly.

Their business model is geared towards high net worth individuals and business lending based on cash flow, (IIRC). Just the type of bank that ChpBstrd predicted would be affected on the "SVB Goes Under" thread. And, sure enough, FRC got hammered today.

I did some bottom fishing and got 200 shares of FRC as a short term trade. I plan to hold them for about a week, hopefully they will bounce back around $60 (or so) and I can get a quick double.
Thanks, chasesfish, for the dilution warning. I'm hoping FRC's capital raise in Feb will be sufficient, but it's hard for me to get a feel for how far $250m would go to solving any problems for FRC. It's about 1/8 the size of SVB's failed capital raise and I'm estimating FRC is about 1/8 the size of SVC, but ¯\_(ツ)_/¯
Interesting question. Some back-of-napkin math and a glance at Yahoo Finance might provide the "an" answer.

On 12/31/2022 FRC held $28B in its "securities and investments / held to maturity" account. Let's assume they were reaching for yield in 2021 and buying 10-year treasuries at 1.62%, the yield in mid-March 2021. Now that bond has an 8-year duration and the prevailing rate for treasuries at that duration is about 3.7%.

Plugging these numbers into a handy bond price calculator reveals that for every $1,000 invested this way the bank now has $857.10, a 14.3% loss. So for every dollar in deposits, they'd hold $0.857 if they liquidated their bonds today.

So what's the unrecognized loss on a $28 billion "held to maturity" portfolio?
$28B x -0.143 =  ~$4B

So their bold and proactive $250M capital raise and dilution only offset 1/16th of FRC's unrecognized bond losses according to these assumptions. It seems doubtful to me that they could keep using this strategy to recapitalize.

@chasesfish can check the validity of my assumption on the typical duration of bank-owned assets. It's only a slightly different picture if they were only buying 5 years' duration in 2021. In that case the bonds would still be down 10% (yield on 5y bond then = 0.83%, yield on 3y bond now = 4.05%). Today's inverted yield curve made playing it safe on duration in 2021 a losing bet too!

The capital raise was the right thing to do, and greatly reduces the odds of a bank run or liquidity problem, but it alone seems insufficient to plug a hole that has been getting bigger and bigger with each rate hike, and which may continue to grow. The key variable to predicting a bank run here seems to be the percentage of assets in excess of FDIC insurance. Those depositors know FRC can't make every depositor whole if the FDIC seizes the bank, and so it's a game of chicken to get out in time.

From the FDIC's point of view, most banks in the US look like this! Hence the new federal lending facility rather than seizing every bank for being undercapitalized.
Thank you for finding the answers, @ChpBstrd  and thank you @chasesfish for confirming the math.

I wasn't quite sure how to check this, so this is very helpful.

My question: FRC announced they had a $70 billion loan facility (is that the right word?) from the Fed and JPM Chase. Basically, they've got over twice the amount of their Hold to Maturity 'bucket'. So, in theory, they should be able to draw from the $70 billion before having to realize losses in the Hold to Maturity bonds, right? Am I overlooking something?
Even if they don't have to sell any Hold to Maturity bonds, it does seem now that $250m is just a drop in the ocean.

nouseforausername

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Re: buy bank stocks on the dip
« Reply #38 on: March 16, 2023, 08:18:57 AM »
Good info, gang!

In Pacnp, fingers crossed.

what is pacnp?

Maybe the Pa. Coalition of Nurse Practitioners is getting into banking. #Bloodbank?

bwall

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Re: buy bank stocks on the dip
« Reply #39 on: March 16, 2023, 08:28:10 AM »
I did some bottom fishing and got 200 shares of FRC as a short term trade. I plan to hold them for about a week, hopefully they will bounce back around $60 (or so) and I can get a quick double.
Thanks, chasesfish, for the dilution warning. I'm hoping FRC's capital raise in Feb will be sufficient, but it's hard for me to get a feel for how far $250m would go to solving any problems for FRC. It's about 1/8 the size of SVB's failed capital raise and I'm estimating FRC is about 1/8 the size of SVC, but ¯\_(ツ)_/¯

bold move! good luck!
Thanks! I sold yesterday afternoon for a 30% profit. I was up as much as 75%, but watched it melt to 30% and decided I couldn't stand the heat, so I got out of the kitchen. The #1 rule of trading, when the trade doesn't go the way you expected, you have to exit the trade. I was expecting the crisis to be mainly over by Tuesday and then yesterday another bank (Credit Suisse) wobbled so I sold FRC. Good thing I did because this morning it opened at $20 (!!!). So, I bought 300 shares at open for about the same USD amount as I sold the 200 shares for yesterday afternoon. It might still all go to zero, though. Never a dull moment.
 

EscapeVelocity2020

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Re: buy bank stocks on the dip
« Reply #40 on: March 16, 2023, 09:04:56 AM »
It does seem like FRC is massively undervalued and unlikely to collapse, but they might also be sold off...   You'd think that the majority of nervous depositors would have flushed out by this point...

But I'll enjoy my risk taking on a $20 buy in March Madness bracket and wagering make-believe Twitch channel points.  I do love following you high rollers though!

daverobev

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Re: buy bank stocks on the dip
« Reply #41 on: March 16, 2023, 09:32:33 AM »
Apparently FRC is looking for buyers... commons down, prefs up...

chasesfish

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Re: buy bank stocks on the dip
« Reply #42 on: March 16, 2023, 10:34:55 AM »
I doubled down on my pref position on FRC at $8, unloaded half of the total position today on the news.

Kind of what I predicted with both them and PACW, but FRC is the closest to insolvent.  Saw an analysis of their HTM marks taking their equity position to $13bil, which is right on the cusp of valuable / not valuable to an acquirer.   Great deposit base and wealth business, but $13bil is a lot of money, even to the likes of TFC, USB, and PNC, who would be the preferred acquirers from a regulator.

Bond rates going down helps, if the 5yr treasury closes below 4% on March 31st, all these banks have more equity at quarter end.

bwall

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Re: buy bank stocks on the dip
« Reply #43 on: March 16, 2023, 10:52:46 AM »
I doubled down on my pref position on FRC at $8, unloaded half of the total position today on the news.

Kind of what I predicted with both them and PACW, but FRC is the closest to insolvent.  Saw an analysis of their HTM marks taking their equity position to $13bil, which is right on the cusp of valuable / not valuable to an acquirer.   Great deposit base and wealth business, but $13bil is a lot of money, even to the likes of TFC, USB, and PNC, who would be the preferred acquirers from a regulator.

Bond rates going down helps, if the 5yr treasury closes below 4% on March 31st, all these banks have more equity at quarter end.

Thank you for the analysis.
Here is a question I have, if I understand your analysis correctly: The bank's equity is around $13 billion (+/-), which is "Right on the cusp of valuable/ not valuable to an acquirer."

I can imagine that the acquirer is going want to have a tidy sum for their efforts for saddling up their white horse and armor and riding to the rescue, say, $3 billion. That still leaves a market cap of the target acquisition of around $10 billion (or so). So, why is FRC trading down from $30 (market cap of $5.5b) to $20 (market cap of $3.8b) on the news of a potential sale, as reported in the news? Or was there other news driving down the stock?

As I write this FRC is trending up, around $26 - $27 on the same news (?), so I guess maybe now a sale is viewed positively? Or was the stock at $20 priced for bankruptcy?

I'm scratching my head on this one. Thoughts?

chasesfish

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Re: buy bank stocks on the dip
« Reply #44 on: March 16, 2023, 10:59:15 AM »
@bwall I think FRC's tangible book value is negative $13bil.   That changes daily based on rates with bond marks, ect, but in a liquidation they're out of money.

My question is today, is their goodwill worth that?

I think it's worth that or a little more, but a very expensive merger.   They have a great wealth business, good deposit business, and some premier (yet underpriced) borrowing customers.   I think PNC would pay that for them.

I just sold out the rest of my position at $13.45 on the FRC-N prefs.   Just not enough upside left, happy to see the announcement about some intracompany bank deposits removing the immediate pressure.

Happy to have the irrational market hand me a little money. 


bwall

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Re: buy bank stocks on the dip
« Reply #45 on: March 16, 2023, 11:22:53 AM »
@bwall I think FRC's tangible book value is negative $13bil.   That changes daily based on rates with bond marks, ect, but in a liquidation they're out of money.

My question is today, is their goodwill worth that?

I think it's worth that or a little more, but a very expensive merger.   They have a great wealth business, good deposit business, and some premier (yet underpriced) borrowing customers.   I think PNC would pay that for them.

I just sold out the rest of my position at $13.45 on the FRC-N prefs.   Just not enough upside left, happy to see the announcement about some intracompany bank deposits removing the immediate pressure.

Happy to have the irrational market hand me a little money.

Oops! Negative $13 billion. Yeh, that changes everything. OK. Now I understand. Thank you for clarifying.

chasesfish

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Re: buy bank stocks on the dip
« Reply #46 on: March 16, 2023, 03:14:35 PM »
@bwall Closed out the rest of my prefs.   Happy to take $7500 out of this insanity.  The risk/return profile was better on these things at $8 than at $13-$14 when the max price is $18 but I could also be wiped out.

Here's the CNBC rescue story, towards the bottom it references a "$25bil hole in their balance sheet".   Tangible equity on their books was just over $17bil as of 12/31.   So right now they're estimated it as an $8bil hole.   The difference is probably the change in treasuries happening daily, but either way the bank has a negative value today.

https://www.cnbc.com/2023/03/16/group-of-financial-institutions-in-talks-to-deposit-about-20-billion-in-first-republic-sources-say.html


daverobev

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Re: buy bank stocks on the dip
« Reply #47 on: March 16, 2023, 03:24:28 PM »
$7.5k wow, you're a lot braver than I am.

Edit - maybe have another go tomorrow, FRC-PN has dropped after hours to ~$11.35.

Assuming these companies won't implode, those yields are really attractive. Really tempting. FRC, PACW, WAL prefs.
« Last Edit: March 16, 2023, 03:50:39 PM by daverobev »

bwall

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Re: buy bank stocks on the dip
« Reply #48 on: March 16, 2023, 03:55:24 PM »
@bwall Closed out the rest of my prefs.   Happy to take $7500 out of this insanity.  The risk/return profile was better on these things at $8 than at $13-$14 when the max price is $18 but I could also be wiped out.

Here's the CNBC rescue story, towards the bottom it references a "$25bil hole in their balance sheet".   Tangible equity on their books was just over $17bil as of 12/31.   So right now they're estimated it as an $8bil hole.   The difference is probably the change in treasuries happening daily, but either way the bank has a negative value today.

https://www.cnbc.com/2023/03/16/group-of-financial-institutions-in-talks-to-deposit-about-20-billion-in-first-republic-sources-say.html

Holy Cow! "And just like that, $25billion was gone." Thanks for the link. And, congratulations on your profitable trade. I think you'll also receive a dividend as you owned shares on the ex-dividend date, right? Well done!

This afternoon I sold 200 of the 300 shares I bought this morning for about 70% gain. I wasn't sure the stock was done going up, so I kept the last 100 shares and sold a $40 covered call 17Mar23 expiration for $2.30. It looks like the call will expire out of the money, but I'd be happy if it exercises tomorrow.

I had no idea how bad it was/is for FRC. I'm sure they can repair the balance sheet relatively easily, b/c they are a great bank. But, it's stunning how quickly the stock cratered and they (probably) almost went out of business. In hindsight, I should've gone in bigger with the preferred like you did and had less risk.


chasesfish

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Re: buy bank stocks on the dip
« Reply #49 on: March 16, 2023, 04:12:48 PM »
It'll be a nice bonus if I picked up a divy, not even sure.   Nice work on locking in a profit.

FRC suspended their common after the bell and now down 25%, but these swing traders might run the stock up 50% by noon tomorrow.  Just wild to see the boring industry I worked in trade like a 2nd tier crypto coin. 

I just shake my head at the entire thing.    Karsten @ Early Retirement Now finally posted on the topic, nice to see it as someone who worked at the Federal Reserve before a large regional. 

https://earlyretirementnow.com/2023/03/16/march-2023-market-musings/

The thing that stuck out to me is the statement along the line of "the bank's have used an accounting location meant to hold illiquid / difficult to price securities for hiding duration risk on liquid securities".    That's what I was trying to say about my post as well, it's one thing if you are Wachovia bank and have a performing 1st mortgage at 90% loan to value, it's not fair to mark that to 40% of it's value just because nobody wants to buy it this week.  There's still a residual value.   Parking a liquid security to disguise duration risk then tell the world you have a positive book value is crazy!