Yet Another Value Podcast - Gator Capital Management's Derek Pilecki shares his thoughts on Banks and Financials in 2024

Episode Date: March 18, 2024

Derek Pilecki, CFA, Managing Member and Portfolio Manager at Gator Capital Management, joins the podcast to have a general conversation about the Financial Sector: banks, crypto and more! For more information about Gator Capital Management, please visit: https://gatorcapital.com/ Chapters: [0:00] Introduction + Episode sponsor: Tegus [1:49] What's most interesting to Derek in Financials sector today / $NYCB / Valley and Western Alliance [12:28] Western Alliance [19:43] Capital One and thoughts on Discover merger [28:36] Overall regulatory environment with banks and financials [30:51] Election and how that affects banks [33:26] Robinhood [41:47] Fannie's and Freddie's [47:50] $NYCB cont'd. [50:32] Thoughts on buybacks based on conversations with bank CEO's [1:01:18] Why Derek thinks banks are below average businesses Today's episode is sponsored by: Tegus This episode is brought to you by Tegus, the future of investment research. From the beginning, Tegus has been committed to creating efficiencies in the research process by making it easy to access the content that investors need to get to differentiated insights. Today, they’re taking it one step further by bundling qualitative content, quantitative data, and better automation and technology together in the same platform. Instead of piecing together data from fragmented sources, just log in to Tegus to get expert research, company- and industry-specific metrics and KPIs, SEC filings, and more, all under the same license cost. You can even take your work offline with an Excel Add-in that updates almost any model with the latest financial data — keeping all your custom formatting intact. Tegus is the fastest way to learn about a public or private company and the only platform you’ll need for fundamental research. To try it free today, visit Tegus.com/value

This episode is sponsored by TIGIS, the future of investment research. From the beginning, TIGIS has been committed to creating efficiencies in the research process by making it easy to access the content that investors need to get differentiated insights. Today, they're taking it one step further by bundling qualitative content, quantitative data, and better automation and technology together in the same platform. Instead of piecing together data from fragmented sources, just log into TIGIS to get expert research, company and industry specific metrics and KPI's, SEC filings, and more, all under the same

license costs. You can even take a look at your work offline with an Excel add-in that updates almost any model with the latest financial data, keeping all your custom formatting intact. TIGIS is the fastest way to learn about a public or private company and the only platform you'll need for fundamental research. To try it for free today, visit tigis.com slash value. That's Tegus.com All right. Hello and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker, also the founder of Yet Another Value Blog.com. If you liked this podcast, it would mean a lot if you could rate, subscribe, review it wherever you're watching or listening to it. With me today, I'm happy to have Derek Pellecky. Derek is from, well, Derek, are you the CIO for at Gator or what's the official title? Yeah, I just call myself a portfolio manager. Portfolio Manager at Gator. Well, Derek, thanks for coming on. Yep. Thanks for having me. Look, I really happy to have you. Before we get started today, just want to remind everyone, quick disclaimer. Nothing on this podcast is investing in advice. That's always going to be true, but particularly true today because as I was telling Derek

before we started recording, I've been following Derek's letters for probably 10 years at this point. And we're just going to be going through the financial sector space in general. So we'll be talking about a lot of different companies, a lot of different stocks, just remember, not investing in advice, please consults financial advisor, all of that. So Derek, we are talking today. I believe it's March 12th is the official day. Tons of stuff happening in the financial space.

We can talk about anything. We could talk crypto. We could talk regional banks. We could talk, just all sorts of stuff. I'll just start by asking you, you know, as we sit here March 12th, how are you thinking about the financial sector today? What's most interesting on your mind these days? I mean, I think the way the sector's from trading in the wake of NYCB news is really the most interesting, right? I mean, we got through most of earning season.

The banks were reporting just fine. NYCB was one of the last big of the larger banks to report. and just totally change the narrative for the whole sector, right? And so, like, a lot of names are down. A lot of names that had really good earnings in Q4 are down a ton. And so I think that's the most interesting thing right here. So I guess on the names that are down, I wrote a piece on this. It was so crazy.

You know, as you said, every bank had reported. NYCB is one of the last to report. They report and they disclose. I don't think it was unknown the rent regulated portfolio they had, but I think the degree and the magnitude and everything. everything really shot people. They report the stock's down 50% in a day, 50% the next day, whatever. But every other bank gets hit. And I did think it was kind of interesting that everybody just kind of went and said, oh, all these banks that reported great credit trends,

everything, you know, Valley, Western Alliance. Some banks that don't even have rent regulated exposure were getting hit 5% or 10%. And some of them have got it back. Some of them not, I guess, you know, you could take two minds of that. You could say, hey, the market shot first and asked questions later. Or you could say the market's looking at these and saying, hey, lending is complicated, and if we missed it at NYCB, maybe we're not missing it on rent regulated, but maybe we're missing it on government leasing somewhere else or all the sort of how do you think, how are you thinking about that? Yeah, I think investors in the regional bank space have PSTD for to some extent, right?

I mean, like, we just went through March of 2023 and I think the NYCB news was like, oh, no, not again. And let's just cut our risk and move on. I think a couple other currents, one that you mentioned about, like, okay, credit quality, like we're seeing the first signs in NYCV here. NYCB was supposed to have like perfect credit, right? I mean, they've had perfect credit for years, decades, with New York apartment buildings because there have been no losses.

And this is a change, right? And then the other narrative of them crossing $100 billion and supposedly the regulators tapping them on the shoulder and saying you have to increase liquidity and increase your loan loss reserves to look more peer-like, all of a sudden, you have these banks that are approaching $100 billion, like, okay, what do these banks have to do to do to get to those levels? And so I think there's several things going on there. But, you know, a lot of banks that had just fine earnings that are pretty far away from $100 billion are down, you know, 15%. I think that's pretty interesting. Let me, a few things I want to follow up. So in March

23, let's just start there. That was deposit risk, right? You had, especially at Silicon Valley Bank, you had people just, they were pulling their deposits left and right, and you saw how quickly, you know, I do remember people were comparing WAMU in 2008 where, you know, five or seven percent of the deposits left in 48 hours because people were still literally going and trying to deposit checks, where a Silicon Valley Bank, you just wired out. A lot of people were rethinking deposit risk. And I'm of two minds of it, right? Like, yes, deposits are scary, but I've heard a lot of people throw around deposit risk on the heels of NYCB. And I kind of look at it. NYCB wasn't really having flight until like the morning before the bail in or bail out or whatever happened.

And I kind of think like if deposits were going to leave, they'd already left. So how do you look at deposit risk in these, especially regional banks these days? Yeah. I mean, I think the big surprise from March of 2023 was the level of uninsured deposits in the banking industry. Like I saw one, I think it was either Stephen, I think Stevens put out a report that said that the average level of uninsured deposits or the median level of uninsured deposits in the regional banks was 39%. And even being a bank investor, that seemed like a shockly high number. Like to some extent, I understand $250,000 is not a high level for an insured deposit account. Like I have a retired school teacher who has been a diligent, thrifty woman all her life. And she's gotten a little over a

million bucks. Like $250,000 is not a lot of money for somebody who's been thrifty in their 70s, right? And so, like, we need to raise a level of deposit insurance. Like, for consumers, it needs to go up. And for operating accounts for businesses, it needs to be higher. Silicon Valley was just off the charts. I mean, they had, Bill.com had a nine figure checking account. I mean, that's, the government shouldn't have to insured or the industry shouldn't have to insure those accounts. But it wasn't it, wasn't it, a circle had like four billion dollars in uninsured deposits sitting at it? Like, I saw that number. I was like, kind of like, dude, just let just let the freaking guys fail $4 billion in uninsured deposits.

Are you kidding me? I mean, I guess I'm of the view of as a society, we can prevent bank runs by just saying everything's insured, right? There's no societal benefit of bank runs. Nobody benefits from them, right? There's no discipline imposed on the banks by depositors. Zero. Like Silicon Valley had a $16 billion market cap when they went to go raise that capital.

There's no depositor who would look at their, look at that market cap and say, oh, my dot. deposits at risk. Like, the depositors just don't enforce discipline on the bank. So the theory that we have this concept of a limit on deposit insurance is questionable in my mind. Like, there were people who were long First Republic or Silicon Valley Bank stock who get paid professionally to look at this and go to them and be like, hey, what do you think about the health and maturity issues? Like, they've got negative equity adjusted. And they wouldn't know what you were talking about. And that is just absolute shame on them. But like, if a professional investor kind of doesn't know what they're talking about. Now, they're probably not like a financial

investor like you if that was the case. But if they couldn't be expected to pick that up in a 10K, like how can you expect mom and pop who are just, you know, going and getting a to toaster of it when they open a deposit accounts get that. I'm completely with you there. I completely agree. And so then the question of my mind is why hasn't it happened already? Why haven't we raised deposit insurance? And I guess there's no political capital right now to to raise deposit insurance because it makes it look like you're bailing out rich people by raising deposit insurance where you're actually making the system safer. So, you know, hopefully that will change in coming years and more sanity in Washington, but who knows? Oh, go ahead. Go ahead. Oh, you know,

I guess the other thing is in Dodd-Frank, I think they implemented something where Congress has to sign off any increases in deposit insurance rather than the FDIC just making regulation change. So they're just going to make it harder to raise deposit insurance. The two most first, banks that we got asked about and that I think are probably among the most interesting right now are Valley and Western Alliance. So let's start with Valley. And for people who don't know Valley is, I believe they're Jersey based, but they've got a lot of New York City lending. And people looked at them when NYCB kind of had all their issues, Valley was the first thing they shot, right? Because there's a lot of similarities there. And people are just lobbying in tons of questions. I don't believe, I know they're not a top five position for you. I don't know if you got a position one way or another, but just wanted to ask you, because I know you cover all these things. What do you think about Valley these days? Yeah, I mean, I don't own a position in Valley. I haven't owned a position in Valley. It's on my to-do list of things to work on because I think it's interesting. I think they have a very conservative credit culture. I guess the obvious scary things of New York City exposure or Manhattan exposure,

you know, a lot of fixed rate loans. But I think there's a potential opportunity there. I just haven't done enough work to say, hey, they're clean. I feel comfortable owning it. I like that. I like that answer. I do think one interesting thing is Valley, from what I remember, was very close to taking over the Silicon Valley Bank remains. And FC First Citizens obviously beat them to that. But Valley like kind of made it known they were the backup bidder, if I remember correctly. And then NYCB obviously won a lot of the signature leftover assets. And I do just think it's interesting. In March, 2003, there was a lot of stories like, hey, if you were approved to be a bidder, that was like the all clear signal from the Fed. Like, this is a safe bank. These. are good and valid getting hit now maybe right or wrong but NYCB obviously it was not the all safe go ahead clear regulators are on your side like obviously they had issues and regulators were the ones who kind of tap them and revealed a lot of those issues i mean that's the head scratcher about

the story of the regulator tapping NYCB on the shoulder and saying raise liquidity and loan loss reserves because the time to do that was when they gave them the deal in march or 23 right instead of taking a bargain purchase gain on the signature deal, to have them put all that extra money into the loan loss reserve back then. It wasn't a, I mean, they were crossing $100 billion. It seems like that with a little bit of foresight on the regulators part, that would have been the time to get everything to the level that they wanted. So NYCB trips over $100 billion.

And what happens is the regulators kind of unexpectedly to NYCB, I think, go to them and say, hey, we're going to treat you like $100 billion bank. today. Loan reserves go up today. Capital requirements go up today. Take a harder look at your bank today. Dividend coming down today to get the capital reserves. I guess my question there is, obviously they bought the signature bank, but a lot of the loans that they're having trouble with, in my opinion, are the loans that, you know, kind of NYCB had written previously to signature, right? Like, I don't think they bought most of signatures rent regulated book, which obviously the FDICs had a lot of trouble selling, but NYCB is having a lot of issues with. I don't

think a lot of the office book came from signature. I guess my question is, if they hadn't bought signature, you know, NYCB is a 60 to 70 billion dollar bank right now? What's happening with NYCB? Is it just kind of they're muddling along? Nobody's really looking under the hood at this thing? Because to my mind, a lot of the issues are still there. It's just like what's happening right now with them? Yeah. And I think if they don't buy signature, they've already had problems because their balance sheet was upside down as far as fixed rate loans versus deposits, right? And so, So buying signature, it made them a lot more, a lot less liability sensitive, right? I mean, they got a lot of cash in the signature deal, and they were able to use that cash

to pay off some FHLB borrowings, pay down some broker deposits with that cash. So their balance sheet would have been upside down if they hadn't done the signature deal. So they might have already had problems. Okay, that's perfect. Let me ask you had another one. This is, as of your Q4 letter, I think your fifth largest position. So Western Alliance, and that is a bank that I remember the day, I hadn't really studied that. I remember the day signature failed, our First Republic or one of them.

The stock went from like 60 to 8 in a day. And I remember looking and be like, oh, I want to buy this. But oh, my God, like bank runs. What does someone know? And they've been clear, like, their depositors were a little freaked out by it and all this or so. As you know, I said today, it trades for about $60 per share. The returns on equity at this franchise have been great. their credit, especially they talk about how they've got great controls for dealing with

trouble loans, recovering on trouble loans, everything. So it trades for 60, tangible book value is about 46. I just want to ask you, what's the thesis there? Because I'll dive into it more in a second. I want to ask you what your thesis on it is. Yeah, so I mean, I think Western Alliance is in this category that I consider like growth banks. Like they are in high returns on capital. If you look at the long-term outperformers in regional banks, they're the ones who grow tangible book value at the highest rates. And usually you need a high ROE to grow tangible book value at a high rate. And you also have to avoid doing dilute of acquisitions, right? So Western Alliance, for the most part, does all organic growth.

Occasionally, they'll make an M&A transaction to buy a platform business that they can then grow. But for the most part, it's all organic growth. And they earn a very high ROE, so they're tangible book value grows over time. And they have not been a huge capital returner. They've been reinvesting that capital back into loan growth. And so they've just been a faster grower than the rest of the industry. I think the management team's very good. I knew him when he was the CFO at NBN, the credit card company 20 years ago.

And I was impressed with him then, followed his career. I think he is a very pragmatic bank manager. I like him a lot. I'm a little worried about, you know, he's 69 years old. sold. So usually bank CEOs don't manage far into their 70s. So I hope he continues to run the bank, but we'll see. I agree with you. I love their credit risk management. They're very proactive when issues start to arise. That way, loan losses have been low so far. So I think they've been tainted with the Silicon Valley rush because they had one business that was venture banking.

You know, they had bought a bank in the Bay Area Bridge that had been, had a lot of Silicon Valley clients. And, you know, they had some deposit outflows not only from those clients, but from tangential businesses because of the headline risk. This episode is sponsored by TIGIS, the future of investment research. From the beginning, TIGIS has been committed to creating efficiencies in the research process by making it easy to access the content that investors need to get differentiated insights. Today, they're taking it one step further by bundling qualitative content, quantitative data, and better automation and technology together in the same platform. Instead of piecing together data from fragmented sources, just log into TIGIS to get expert research, company and industry-specific metrics and KPIs,

SEC filings, and more, all under the same license costs. You can even take a look at your work offline with an Excel add-in that updates almost any model with the latest financial data, keeping all your custom formatting intact. TIGUS is the fastest way to learn about a public or private company and the only platform you'll need for fundamental research. To try it for free today, visit tigis.com slash value. That's Tegus.com slash value. I guess, so I am no financial experts, but the financial expert, but the thing I always

struggle with is like to me, I look at a bank and it's really hard for me to look at U.S. regional banks and understand like these guys were reporting into. last year, 20% plus returns on tangible equity every year. I guess the two knocks I had on them was one, I just didn't understand how a bank could consistently be this good outside of, you know, some of the guys who get cash inflows from buying gift cards at the kiosk and they've got that and they've just got like free money there, which has much different types of risk, right? There's a difference that are risk there. But I wasn't sure how like how a regional bank could kind of earn a 20% return on equity consistently. So I'll just ask you, like, what's the secret

sauce these guys have? And then I do have a follow-up. Yeah, I think some of it's the efficiency ratio. So, you know, banks tend to be very old organization, very bureaucratic. Systems are very ancient, right? So there's a lot of expenses. There's a lot of people involved. It's very efficient. Moving around a lot of paper for some of the newer bank organizations that have been built on more modern architectures. They have less branches. They have less people involved. If you look at Western Alliance, the number of branches they have, they are not a consumer-facing bank, right? They're a commercial bank, so they don't have branches on every corner. And they also have less people in the bureaucracy. They use technology to automate their processes to some

extent. And so I think having that low efficiency ratio and then also just driving those returns through, you know, asking for higher yields on loans and, and be more aggressive in the positive pricing is where you get to the higher returns. Yeah, I guess the other knock I had on Western lines, and this isn't a huge one, but, you know, after First Republic especially, it's always like, go check the fair value of the loans and the health and maturity securities, because First Republic wasn't really held to maturity securities. They had those, but it was a lot of loans to rich guys, you know, 2%, 30, years and any bank that looks and be like, no, we have to fair value those when interest rates

to 7%. It's not huge for them. But, you know, I think they've got about $3 billion of fair value marks on their loans. I'm just looking at their 10K. And I think their overall equity was in the $8 billion range, if I'm remembering correctly off the top of my head. So it's kind of like, oh, $6 billion, $6 billion, actually. So it's kind of like, oh, well, you mark to market and you're paying like a little over two times tangible book value. And even with a great franchise, like, yeah that will accrete back but even with a great franchise like that mark to market what do you think about that yeah so yeah man it's not quite two times book value like right at 60 bucks forty six dollars a share so it's like one oh well i was taking i was taking the three billion

fair value mark on the loans out of that six so then that's kind of how we're slipping to that okay yeah i mean they grew their their single family book at the wrong time so yeah i mean i i i i I think the earnings power is there. I mean, it's going to be a little bit of a drag. I think there's a ton of banks that have a group of fixed rate loans that, I don't know, they're going to just be an anchor around them for a while. I think Western Alliance is in that group, but, I mean, it's like can't have a perfect investment, right? You know, everything is, I agree, it's a knock, but it's not a big deal.

And you know the best way to get rid of that, put up 20% ROEs for a few years, and all of a sudden that loan book looks a lot smaller. You know, when you were mentioning, I didn't realize how tech enabled what Western Alliance was. And when you were mentioned that, I want to talk more about the Discover Capital One merger in a little bit, but just it does strike me the way you were talking about Western Alliance is the way a lot of my friends who are along Capital One,

talk about Capital One, where they say, look, yes, you're buying them at 1.1 times book or something. And yes, obviously, if we go into a recession, credit cards might not be the best place. But what you don't understand is Capital One is so tech enabled, right? Like they have read on their, it is the most modern architecture of any of the banks. And you're paying 1.1 book, but as they, as you compound that, like, it's just going to result in much better returns, lower expense. Like, I guess my two questions to, A, am I thinking about the comparison between Western Alliance and Capital One correctly there? Obviously, two very different banks. But is that kind of the right frame?

And B, I'd actually love to shift to talking about Capital One. Yeah, I agree. and Capital One has been forward thinking on their tax spending and they've been trying to get to a more modern architecture, right? So I agree that they're probably better positioned than the other big banks as from a technology. I guess my question with Capital One is, is that technology spending going to lead to a bigger bottom line or are they going to find other ways to spend that money? Like, my issue has been their Capital One's advertising program, right? When we see their ads all the time, we see the high-profile celebrities in those ads. Taylor Swift, like, how expensive is it to have Taylor Swift in your Capital One ad?

Samuel L. Jackson, Charles Barkley, Jennifer Garner, right? And they're all over the place. Is the extra profit from the tech spend, more efficiency, going to drop to the bus? bottom line and it's kind of shareholders, or is it going to get reinvested in advertising? So would your argument, if I'm taking your argument to its conclusion, is your argument, like, yes, they're more efficient, but they're almost spending, you know, the old thing where the CEOs used to love to have like a branch in Hawaii or something because then they could go to Hawaii on vacation or they love to have a celebrity endorser, as you're saying, because

then they get a hobnob with celebrities. I guess the best would be like Amazon making its way into media, right? Because then Jeff Bezos gets the hobnob with all the Hollywood with celebrities. Is your argument kind of like, yes, they are more efficient, but you're worried that this marketing spend, it's not actually return on investment. It's like kind of the CEO's way and the exact ways of getting to hobnob with important people. I don't know that. I mean, I mean, I respect Rich Fairbank a lot that he's very forward thinking. I just worry that he likes advertising spending, you know, college football bowls or whatever. And I'm not sure. I'm not convinced that their return on marketing spend leads to higher returns.

Yeah. You know, I think there's a lot of waste in that spend. And so I'm worried as a potential shareholder that that's not going to come to me, that it's going to get burned up in just additional ads. Another one just high level I've thought about is they've got the capital one. It's like, it's not quick, slow. They're going after the high end credit card customers, and they've been talking about how, you know, they're putting a lot into it and they think the return on investment is

like measured in seven to eight years. And I've always kind of looked at it and like, I mean, Capital One, I don't know, like going after the Chase Sapphire, they're literally trying to compete with Chase Sapphire reserved and Amex, black or gold or whatever it is. And I've always kind of looking at me like, is starting up a de novo high, high spend credit card where these people are very likely to switch for the best rewards and you're trying to grab them, like, it just didn't seem like a great return on investment. And every, I believe they said it would take seven or eight years to capture what they're grabbing customers out. And I was just like, that doesn't seem like a great return for a bank to me.

I mean, I think Capital One's been going after that high spend customer for a number of years. Like, I think it's been a long time. Like, they were subprime at first, right? And then they went to the barbell strategy of subprime and high spenders. So I think, you know, it's a super competitive space, right? I mean, it's J.P. Morgan and it's American Express and everybody's going after these high spenders. And so, you know, I think they've done been doing it for a long time.

I think it's hard. I think it's a super I'm not I'm not aware or not up to date of what the returns are marginal returns are in that space with that any thoughts on the discovery merger I guess I think the I think it's a super interesting strategic move right the I'm sure Capital One's been wanting to buy Discover for a number of years you know I'll see here that J.P. Morgan was a bidder or was interested in Discover for a long time. I think one of the most interesting things is moving the debit card spend to the Discover network by Capital One, but they didn't move all their credit card spend away from MasterCard to Discover.

And I think about it in terms of you have different interchange rates. You have AMX at the top, Visa and MasterCard in the middle and Discover at the bottom. And Visa and MasterCard, their take rate is, you know, although it's been increasing in recent years, it's not huge. You know, the issuing bank gets most of that discount. And so why Capital One not taking, moving the business away from MasterCard to discover tells me that even with paying MasterCard, Capital One's making more money with issuing MasterCards than if they moved everything to discover. And so if that's the case, and this would be the ideal time to move all that business, like how do they get the Discover discount rate higher? And I think that's a hard, that's going to be a hard thing for Capital One to work through.

Like they want, everybody wants to get to the MX positioning where the MX has, says, we have the big spenders. If you have issue, if you accept to MX cards, we're going to, we're going to bring you the high spenders and they'll spend more than any of your other customers. And so all these stores say, okay, I want to have access to that AMX customer. The Discover customer is not the high spender, right? I mean, it's kind of middle America. And if you layer on Capital One on top of Discover's Middle America customer, you kind of get this hodge of subprime, middle America, and then the high spenders, the Capital One's been going after. So is that going to allow Capital One to

raise Discover's discount rate to parody with MasterCard Visa or even above it. I don't know. You know, that'll be the interesting thing to follow with the story. The two interesting things that struck me, and again, I'm not an expert on it, but I think it's a really fascinating deal, is number one, the call option on buying Discover taking one of the largest credit card issuers in the United States. And even if initially they're not pumping all of their spend through Discover. pumping a lot more spend to try to get more merchants,

maybe keep the rate low to start, but eventually try to close the discount. I think that's really interesting. I think it's really interesting. Now they've got a hammer with MasterCard and Visa every time they negotiate, hey, we're launching Capital One. We've got quick sliver. Now we've got quicker gold.

We're launching that. Is it going to be on MasterCard or is it going to be on Discover? We've got our own network. Like, you guys need to give us a really good rate here or else you're going to miss out on $100 billion worth of spend. I think that's interesting. And then the third thing that's interesting is, if you think back to what we're talking about with Western Alliance Cup 1, I don't think anybody thought, I mean, Discover is selling because they had a lot of regulatory issues. They had a lot of internal controls issues. I don't know of anyone, like, I've done a few extra calls. I don't know of anyone who's out here being like Discover. I mean, their underwriting system, their tech, my God, those guys are light years ahead of everyone else. But people do say that about Capital One. And you think about bringing all the Discover customer base, all of their marketing. spending, everything, all their underwriting onto the Capital One platforms, like they guided

to you. I think it was a billion in synergies, but I've had some people who've been like, look, when you really look under the hood, I would be kind of surprised if maybe it's not pure cost synergies, but just in terms of better underwriting, better marketing spend, they think they're going to blow those synergies out the water. So I think all of those are very interesting considerations. I don't know if you want to add anything to that. I mean, I would just say that the cost synergies seemed really low compared to the potential, right? I mean, just what you said, getting rid of Discover's IT system and just moving those customers onto the Capital One's platform should be a lot bigger savings than what they outlined.

Yeah. Let's see. So Capital One Discover is actually a nice segue into one of the things you mentioned when we were talking about NYCB regulators, right? Like, I don't think there's an antitrust issue with Discover Capital One. And clearly the market's worried about it. We don't have to talk about the antitrust issue here. But regulators and banks is really interesting right now, right?

They tapped NYCB on the shoulder, and that was a big issue. You just hear a lot of banks are saying, hey, the banking regulators are being a lot more aggressive with us. Basel 3 rules are coming in. And, you know, banking's a regulated industry. If we took capital requirements up to 25% tomorrow, bank investors would not be very happy. That would be a lot. So how are you thinking? about just the overall regulatory environment with banks and financials these days?

Yeah, I mean, I think the regulators have been under a lot of pressure recently, right? There's the article about the improprieties that came out in the Wall Street Journal about how there's sexual harassment or, you know, an unsafe workplace. I think there's an S-Y-Svb ramifications, like, why weren't they more on top of that issue? And, you know, then they're going to get pressure. banks are too big. But, you know, every time we go through one of these episodes, the big banks just keep getting bigger, right? I mean, First Republic went to J.P. Morgan, right? And so it's, it seems like we're going to continue this way of a consolidation into the big banks, and people

hate the big banks. So that just leads to more regulation. You know, I think it's tough here with, we're heading into what seems like a little higher credit losses, right? So rates have come up 500 basis points in the past couple of years. A lot of CRE lending seems like it's going to have to get equity injections to roll over to get extensions. So have the regulator's been too lax? And now they're going to suddenly come down hard on the banks. Are they going to be, you know, start looking through loan files more diligently? Are they going to start questioning banks risk management systems, I think that's all higher regulation, higher regulatory costs for the banking system. Yeah. Do you think about anything when it comes to, obviously we're

in an election year, I think people overblow elections a lot of times. How is the election year going to impact Lulu Lemons earnings? Not a lot. But with banks, it does make a difference because the banks are so regulatory controlled. Do you think at all about the election when it comes to, and This isn't just banks, actually. I keep saying banks, but I know you cover, actually, we'll switch to talking about a few other sectors. You cover all financials. Just financials in general, do you think at all about the election and outcomes there?

I mean, I think the most, the best benefit to the banks is that with mergers will be easier in the Republican administration, right? And so, like, I actually think that Discover Capital One is going to have trouble if Biden wins the election. I just don't. I agree, based on typical antitrust view, it should get. pass, but just, I think in this environment, there's no way they're going to let it, or it's going to be really difficult to have a big bank merger like that get passed.

It's so crazy that Discover Capital One is an antitrust crosshairs because, you know, I remember Sprint T-Mobile when that went through, and I probably disagreed with that going through, but their argument was this is not a four to three, right? You had Sprint T-Mobile, Verizon, AT&T, they're like, this is not a four-to-three. This is a two-to-three. AT&T and Verizon are so much bigger and so much more competitive. of we come in and we formed the third competitor. And that merger has actually worked,

I think in large part because Cable was an unexpected entrant more than anything else, but that has worked. Like here, I just really struggle to see what the issue is like, discover they've bungled that network for 15 years. It's not going away, right? At worst, it's four to four. But to me, this is three to four, right? Because Cather 1 is saying, hey, we buy them.

We're going to inject all this spend. We're going to, like, we're actually going to create a competitor. to the big 2.5, right? And it's not like any of the assets are disappearing. Like, I just really struggle to understand the antitrust case. And I almost think, I know it goes against Liz Warren, a lot of them. And I have no issue with them. But I know it goes against a lot of the thinking to be like, Big Bank MNA, let's go. But it actually seems like something that they should be cheering because this is introducing a competitor to the big two and a half, in my opinion.

Right. I guess the tough part is capital one will be the biggest issue of credit cards. So this, you know, forming the giant credit card company like that raise concerns. But I agree with you that, I mean, it should pass on if you look at other industries. It's still going to be a super competitive market. Let's go to something completely different. I read your Q4 letter. I'll include a link in the show notes for anyone who wants to follow along.

And your Q4 letter came out and announced a new position in Robin Hood. And I read it. And as soon as I read it, I was like, oh, my gosh, this is a beaten down stock completely overlooked. This is a great thesis. I need to do work on it. I started doing work on it. And they announced earnings the next day and the stock was up 30% or so.

So I was like, oh, I missed it. But I want to talk about Robin Hood, as of your Q4 letter, your second largest position. I don't know where it is today. We don't have to disclose or anything. But I just want to ask about the overall thesis for Robin Hood. And, you know, it's really interesting right now. Crypto markets, retail trading coming back in a big way. the stock's had a big run, but just want to ask how you're thinking about Robin Hood these days,

overall thesis, all of that. Yeah, so, I mean, I bought Robin Hood after they reported Q3 last year. So Q3, the stock was a little squishy. I think there were two issues. I think this month of September, crypto trading was a little soft, and then they might have lowered their guidance for an interest revenue because the yield curve shifted. And so I looked at those. Those are two environmental factors.

It wasn't like the company failed to produce anything. It was just, you know, if you're going to own a stock for buying. years the environment's going to change especially a broker's stock right so guy i generally don't buy or sell stocks because the environment is like at the margin things on the margin of the environment change but the stock was down 15% after they recorded earnings on those two issues so i knew the stock was close to cash it was about cash value i think their net tangible assets was about eight bucks a share and the stock was at eight bucks um you know i'd been short the stock when they originally came out of the IPO i just thought it was

overvalued. It was, you know, they had their meme stock issue where they shut off trading game stop because they were a shorter in capital. And I just thought it was overvalued at the time. They were spending a lot of money. It wasn't profitable. But in the meantime, since the time I was short to Q3 earnings, they'd gotten religion about getting expenses under control, reining in stock-based compensation. And then they also had been introducing new products. And they had this like very clear product roadmap of introducing new things to customers to actually grow. The customer base was growing, customers were adding new assets. And then I guess to top it off, I remember when I first got in the business in 1999,

Ameritrade was a rocket ship that year. It was up 13 times on the Internet stock bubble. You know, just new accounts, customer acquisition costs were low, lifetime value of a customer was high, Ameritrade just grew like crazy. I was like, okay, Schwab just acquired Ameritrade. And so the industry is in need of another competitor Schwab, right? I mean, we'll get into this in a second, but I think we really need another competitor Schwab.

And I thought Robin Hood could potentially be that other competitor. So buying that net cash value, I felt like there was a little downside risk, given that they had been profitable to the previous three quarters. And then you also have that upside optionality of, you know, if we got another bull market or customers start growing, that they could have a lot of upside there. So that was kind of the thesis, like asymmetrical positioning of the stock. And, you know, I didn't expect it to double in two months, right? I mean, that's just luck. Like, I didn't expect the Bitcoin ETF to launch Robin Hood to start going up.

So from here, like the stocks at 16 and a half. it's down a little today. It's moved a long way in a short period of time. But I think that their Q1 numbers are tracking pretty well, right? I mean, they've spoken to a couple conferences. They've said customer deposits are running above recent orders. Has the stock moved? At this point, it's kind of like a game of expectations where, you know,

the people who've bidded up to $17,000, what are they expecting the company to say on customer growth and net new assets versus to what the number that actually prints. So, like, I kind of am agnostic about the stock here. I still own it, haven't sold any shares, but it's, it's gone up so much. Like, who knows, it's trying to call the next wiggle. No, this is why when I read it, I was like, oh, this is such a good thesis. I'm kicking myself because, like, hey, it's trading close to net cash liquidation value. Now, you would always have the question, you know, I think about something like there was this company

context logic, the ticker. there was WISH, and they had, you know, a billion in cash, and they were just incinerated cash so quickly that the billion became 400 million before you knew it. But you do have the worry of, hey, are they going to just, with Robin Hood, it would be, A, are they just going to keep pouring money into customer acquisition at negative costs just because it's growth at all costs? I think they had solved that, or B, I do remember during the game stuff, like, what if they have regulatory issues and get hit with fines?

But I just love the combination of the downside protection of the assets and the upside of, hey, I've seen this before. They're funding customer growth. And by the way, if we catch another rocket ship, it's hard to remember, but October 2023 was kind of bleak at the time. But if we catch another rocket ship, this thing could skyrocket. I guess with Hood, how much of their, because during 2022, when, you know, everything kind of crashed on the heels of the manias and everything, it felt like they were talking

more about becoming a regular broker, moving away from, hey, we want retailers just like day trading and celebrating memes. And how much of their growth now was kind of. correlated to crypto going up, retail really being interested versus your more traditional, like the people who the mid-30s who you would traditionally think are putting like $10,000 into an e-trade account or something. Right. So, and I think they're starting to get more longer-term customers.

I still think it's a lot of brand-new investors. Like, they're very friendly to brand-new investors. The average account size is like $2,000, right? I mean, it's a lot of small accounts. They have the best user interface, but they don't have a really good. desktop app. The user interfaces on the phone. And so they just introduced retirement accounts, so you couldn't get an IRA account until a couple months ago. You know, like all those new products are in an effort to get bigger accounts, right? They have this gold subscription where for $5 a month,

you become a gold subscriber to Robin Hood and you get 5% on your excess cash. And so, I mean, compared to Schwab, that's huge, right? And so I think that's incenting people to say, hey, start using us for your checking account or leave your excess cash in your brokerage account. And that's driving new customer, bigger balances and new customers. Could you imagine if IPKR heard what you just said, $5 a month to get 5% on your cash? We'll give it to you. Just bring your cash over here. Thomas is going to be having a stroke when here is that.

I hope not. I mean, I mean, I think I hope IBKR continues to work on the user interface, right? I mean, that, to make it easy for new investors. I mean, it's very good for professional investors like us, right? We can kind of struggle through that and love IBKR. I've been a customer for 15 years, but I love it. But, you know, for somebody who's brand new to investing, it's a little tougher, right? You open the IPKR account and you're like, did I just download like a nuclear launch

codes or something? It's so crazy. I'm completely with you. Whereas I don't, I can't remember if I did tried hood, but, you know, I've tried some hood competitors when they were giving out a lot of freebie. in 2021 and it's literally you just load it and they're like press buy here and you have a stock you know it's so intuitive and so simple you mentioned hood has a lot of two thousand dollar customer accounts is it even profitable to have a two thousand dollar customer

account you know just between k yc regulatory like servicing the client is that even profitable i think it probably is at the margin i mean a two thousand dollar customer account they're probably not subscribing up for the gold service they leave a couple hundred bucks they don't pay them any interest in the couple hundred bucks cash that's in the account. So, you know, they make $10 revenue a year off that, maybe, maybe 20. I don't know. They're not mailing statements, right? I mean, they're just sending emails.

Yeah, they probably do have to mail a quarterly statement. But so then, you know, what does that cost a dollar a statement? So it's the marginal cost is $4 or $5 a year. A few years ago, you were following the Fannies and Freddy's pretty closely. Are you still involved there at all? I'm still involved. Yeah, get me. Yeah, so, I mean, I worked at Fannie before business school, right?

I mean, I worked there for five years and, you know, I just, I think eventually it's going to come out of conservatorship. I think, I mean, I only own the preferreds. I don't own the common. I think the common gets diluted pretty hard. I think that, you know, there's the senior preferreds and the junior preferreds and the government owns the senior preferreds. And so the companies have been building their capital, but the government's senior preferred state keeps secreting. And so I don't think that gets forgiven. I think that gets converted to common. And that so like the common doesn't really make sense to me, but I think the junior

preferreds, you know, they'll take a haircut, but the haircut's not going to be anywhere close to the junior prefers. They're trying to like 12 cents on the dollar. I think, you know, it could be, you know, even if they take a 30 or 40 percent discount, it's still a lot upside from here. So just on the fannies, I guess the two things. I mean, look, you've pitched it. Bill Ackman's obviously pitched them before. I guess the two things is it's been, we're in 2024. It's been 15 years since.

And I know a lot of people come and say, hey, the best play on the Trump administration winning is the Fannie Preferts. And I hear that. I get it. You know, you think you put a conservative administration in. They want to get the government out of things. But Trump was in office, you know, four years ago. And I remember four years ago when he came into office. you're like, he's going to get the preferreds out of conservatorship.

And I just wonder, is it in the government's incentive, like, this is Trump, is a Trump admin really going to do it? Is Biden an admin really going to do it? Is any admin really going to do it? Because, yes, you've got constitutional people are saying this is unconstitutional. You've got hedge fund owners who are in the preferreds, but the government's making a lot of money here and they've been able to delay this a long time. Like, is it really in anyone's interest?

Is this ever going to actually happen? I mean, I think it'll happen at the end of an administration. So, like, I don't think it's the first thing Trump does if he comes in. I think it'll happen towards the end of an administration. There's possibility if Biden loses, they could do something to, you know, because Biden could use it as a honeypot for housing finance, right? And so they could use the proceeds from an IPO to fund some pet housing programs. programs the Democrats have. I don't know that like from what I want to talk to people in Washington,

I don't know the Biden administration is really getting ready for that scenario. So like I don't think that it's likely to happen this year. Under Trump, I mean, I agree with you the story was Trump's going to, Trump's going to get them out of conservatorship. I think there was, I think Secretary Munition who decided not to do it because I think there is some people questioning or saying that, oh, he had good ties to some junior preferred holder, so it's definitely going to do it. It wasn't good ties. I remember when they got elected and he put them in, I was like, oh, my God, these are going to convert this because. Yeah, I don't think he wanted to ruin his reputation, right?

I mean, I think he had a pretty successful stint as Treasury Secretary, and I don't think he wanted any questions about his ethics there. And so I think he put a kibosh on it. This is, you know, my read of it. I completely agree. I was just going to finish the story. He had ties to a lot of preferred shareholders. And I remember when he got elected, a lot of people were looking and be like, this might be corrupt if it went through, but it does feel like there are a lot of ties here

that these are going to get released. Speaking of Secretary of Mnuchin, he pumped money in $2 per share, lots of common, lots of warrants into NYCB. The stock is 340. So his investment is a lot different than what shareholders are looking at these days. But, you know, it's tangible book diluted for the warrants. is a little over six. I think they're saying there's probably going to be a lot of capital reserve building in the next few months. But do you have any thoughts either, maybe not on NYCB,

but just on his investment into NYCB? I mean, I think it was a super good investment on his part. I mean, at that entry price, I don't see how he's going to lose money. I guess the thing I have a question about is, did they raise enough capital? You know, a billion dollars, a billion six if they exercise the warrants. You know, that... The warrants are cashless, so I don't think that would bring anything in. Oh, okay. Yeah. Yep.

So, you know, I guess it's an open question. Like, do they know that the CRA issues are small enough that the billion is going to be fine? But it looks good, looks like a good entry price from here. When I was hearing them talk on the heels of it, I was with you. I was like, hey, why not just like buttoned up, you know, if you're about to raise capital, you just go, you go over so that you kill any concerns. And I was kind of with you, but it seemed to me like, I think the regulators, you know, as the regulators tats NYCB on the shoulder, as we talked about earlier, it seemed like they talked to a lot of regulators. And the one thing with the bank, especially with loans that are deteriorating, but deteriorating slowly, it seemed to me like the regulators might have given them the green light, hey, put this money in and we're going to give you the two years to kind of zombie bank accrete your way out of this, right?

And if you can do that, because there is, to my understanding, a very good deposit base there. there's some good franchises. If you can do that and kind of, you know, the PNPR is, I think about 850 to 900 million per year. So even if you take all of that and put it to reserves, if you're buying it at $2 and the government's promise to give you the runway to get to the other side, like buying at $2 with tangible book at 6, take two years, put it all towards reserves, that $2 investment looks really, really attractive, which is kind of how I was thinking about it. I mean, I think that's a fair way to think about it. Like I don't know that there's discussions took place, but I wouldn't be surprised.

Yeah. The other funny thing I heard was, I think it's the, obviously NYCB is having the rent regulated issues. And I think the board is nine people, two from two landlords, two tenants, and then five appointed from the mayor. And they're like, man, maybe you make that investment and you've got a line into the mayor's office like, hey, we're going to fund everything you do. But man, you are appointing five people who are really favorable to, you know, the rent's

going up four percent instead of three. percent next year or something. I mean, I think it's super interesting about NYCB's loan loss reserves because, you know, they're in the asset class that they had like literally $100,000 of losses over 30 years. And so, you know, since they come public in the early to mid-90s. And so they had always run with light loan loss reserves because they always said, look at our history, like close to zero losses. And then right when they do the signature deal and they get to Q4 and the regulators,

on the shoulder. They also have a couple of loan issues. It's like, oh, hold on a second. This portfolio is not supposed to have issues, right? They've always had this great history of credit. They ran with lower loan loss reserves because they always had better experience. And now do they not have that experience? So I think that whole dynamic makes it a super interesting story. Are these two loan issues that they brought up? Are they just the only two, or is there a whole bunch of them that we don't see yet? You know, there's stories about them doing interest-only loans and you know i think it's a fascinating fascinating situation as you're saying it it blew my mind like when their q4 results came out and they say hey we've got this 22 billion

dollar loan portfolio or whatever it was and over the past 10 years write-offs in it have rounded to literally zero and then you know it just surprised me everyone's freaking out about this I'm like, what are you guys freaking out about like $22 billion of loans and you guys are freaking out? They've had no writeoffs. Like this is this is money good. And then you look at it and say, oh, all of a sudden 13% of these loans are getting criticized. And even there, you're kind of like they were doing it at 60% LTV. But if you had zero losses for 30 years, you would have to think there's a lot of cushion there.

It's just it's crazy how quickly things flipped and that margin flipped with obviously it's all the 2019 law. But as one friend told me, was like, look, they had a great franchise. But what that franchise was, was you were underwriting political risk, whether you knew it or not, you were underwriting political risk. And that chicken came home to Roost in 2019. And it just took a couple more years for the problems really to show themselves. For sure. Sure. Hit me.

I wanted to talk to you about a subject. Sorry to drive you off course. But I wanted to talk, like I've been having this discussion with a lot of bank management and its own buybacks. and so my thinking on buybacks is evolved and I wanted to go through the subject with you because you might have a different view but I'm excited I've become less enthused with buybacks and so you know as a bank investor going through a couple cycles I see that the banks who have high capital have an easier time getting through also they get some opportunities at the end of the cycle right buying failed banks or more distressed franchises so I guess I've been trying to

counsel a lot of my banks that I meet with to don't be so quick on the buyback trigger like you like some of them are like well our stocks below tangible book value and a lot of people are telling us the buyback because it's accretive i'm like uh you know when you're at 90% of tangible book it's not that accretive it's basically the same as buying a back at tangible book and you know you have to buy so much you know if you're barclays or city group and you're trading 45% of tangible you should be buy back your stock. At 90%, I don't know if it's that a creative to book value. Also, you should think about capital in the sense of optionality. Just because you don't buy back stock today doesn't mean you can't buy it back in six months or a year. You have optionality.

By retaining the capital, you retain optionality. And so that's good as a bank manager. I guess one of the reasons why investors really like buybacks is it prevents management from making dumb acquisitions, right? So, like, if you're a shareholder of Coca-Cola, you want them to buy back stocks so that they don't buy Columbia pictures, right? I mean, that is a dumb, value-to-strain acquisition. You'd rather just own more Coca-Cola, right?

And so I totally get that. Like, you don't want bad acquisitions. But if you're a bank management team and there aren't that many hostile bank mergers or there are no hostile bank mergers, you really don't go outside of the banking industry. Maybe you would overpay for a bank if you had a bunch of capital in your storehouse. But you also have the optionality.

If there's a good growth situation, you can make more organic loans and grow that way. And so I've just been changing my view of buybacks and talking to bank management teams about not being so quick on buybacks and just want to get your view or push back from you. No, look, I do love one of the great things about banks is when they trade interchangeable. book, you can, if you trust the book, you can create a lot of value quickly, in my opinion, by buying. I guess I would ask you two things. So, number one, the level. You've mentioned 90% is not that different than 100% for buying back stock. And I guess how do you think about that level, right? And how do you think about that level changing in terms of with the ROE, the bank can produce? Because let's take Western Alliance, which we talked about. And let's just

to make numbers simple, say that we think they can do 20% returns on tangible capital, right? That means every dollar that they spend buying back their stock is not a dollar they can invest at 20% returns on tangible capital. But humorously, because a bank that gets 20% returns in tangible capital, it should be worth a lot more than book value. It's trading even cheaper when it's at 90. So how do you weigh those two measures? Like, where is the line for you where, yes, now is where I think they should start leaning into the share re purchases. I actually think Western Alliance is a great example of a bank management team that kind of aligns with what I'm thinking, like, they were issuing capital.

They had an ATM issuance back when, you know, three years ago when the stock was above 100. And they were, they had loan opportunities. They were hitting the ATM, raising capital and making more loans. And then when the stock during, maybe it wasn't during Silicon Valley, it was maybe during COVID when the stock was below tangible book, they were buying back shares, you know, at 80% of tangible book. I think they've shown flexibility of both issuing when it's a high price of tangible book, buying back when it's below tangible book. Now, I wouldn't say, you know, with their high

ROE, they, you know, buying it back to tangible book, if they can't put all that capital work and it's below tangible book, I was okay with them buying back stock. But, you know, as soon as they got above tangible book, they're like, we're not buying back any more shares above tangible because we're not going to dilute tangible book by buying above tangible buck. You know, if, you know, are we like, I guess I think some investors think you need to buy back stock to get your equity account lower to show a higher ROI so that you got a higher valuation. And I think investors are the market smarter than that, right? The market can suss out what's the natural ROI of the business holding aside whether capital levels correct?

or not. Like if a company like First Citizens has excess capital, the market can kind of figure out, okay, their reported ROE is depressed because I know they have excess capital. And so I don't think you can fool the market by artificially making your equity account smaller to show the buyer. The best thing about banks is the first number they report, it kind of below the income statement, is it's not ROE, it's return on average assets, right? So you can kind of just look at the return on average assets, you know, anything in the high approaching one or above one is great. But, you know, cool, your ROE's 20 because you're running 5% set one and you're about to get seized by the regulators. Okay, great, your RV is great, but you're about to get

seized. You know, I'm with you. I think the market does a good job of looking through that, that individual metric. Yeah, I agree. This episode is sponsored by TIGIS, the future of investment research. From the beginning, TIGIS has been committed to creating efficiencies in the research process by making it easy to access the content that investors need to get differentiated insights. Today, they're taking it one step further by bundling qualitative content, quantitative data, and better automation and technology together in the same platform. Instead of piecing together data from fragment and sources, just log into TIGIS to get expert research, company and industry specific metrics and KPIs, SEC filings, and more,

all under the same license costs. You can even take a look at your work offline with an Excel add-in that updates almost any model with the latest financial data, keeping all your custom formatting intact. TIGIS is the fastest way to learn about a public or private company and the only platform you'll need for fundamental research. To try it for free today, visit tigis.com slash value. That's T-E-G-U-S dot com slash value. No, it's an interesting thought, especially for someone whose largest position is for citizens. You know, people can read the Q4 letter and first citizens has done a fantastic job of they've done these distressed deals, but I think what a lot of people like is they do to the stress deals and then they take all that excess capital and they buy back

stock like crazy. So it's an interesting thought process. I don't know. I do worry, you know, you look at something like there are all, there are other things, but there are a lot of small regional banks or even smaller than regional that have specific niche focuses, right? And a lot of people worry, these trade well below book value. One reason is because people are worried about the concentration risk, right? If you're lending all to one niche, then if something goes wrong with that niche, you're going to have huge problems all at once. But B, a lot of these guys, you talk to the management teams, and they think buying back stock is almost like a sign of failure, and they just rather invest in loans. And often their ROAs and ROEs are very good, but the market

is clearly worried about empire building and refusal to buyback share. So it's just, I'm with you. There can be better uses for share buybacks, but the two things that strike me are that gray area and a lot the market's going to start saying, oh, these guys are just building capital. And then the other issue is like Valley, Valley gets passed over for Silicon Valley by first citizens. And if you're running with excess capital for three years and you don't get chosen for that one swing, that's a big opportunity cost. And does that also start encouraging you to make that one swing a little too aggressively? You know, where the one swing NYCB probably, maybe signature saved them, But it pushes them over $100 billion or Jamie Diamond's always talked about how you regret some of the bailouts he did in 2008.

Like maybe you make a swing and you pay too much for it or it's too much for you to handle and you do that because you've sat on your hands for three years. I think your point about empire building is really important because I think there are a lot of small banks where the management team does not own a lot of stock. Like their biggest assets, they're W2. And so that prevents them from wanting to sell because if they're the seller, they're out of a job. and they're not going to another bank, they kind of need to retain their paycheck. And so, you know, finding those situations where the bank CEO thinks like an owner.

And, you know, I find the guys who try to grow tangible book value growth also think like owners. Like, they think of, like, that's how I'm going to get value out of this bank. And there's a lot of smaller banks who, you know, you run a small bank. You're the king, right? I mean, people have to come to you for capital.

Every small business in your town, your city, comes to you for capital. And so there's not much incentive to leave those jobs. And I think that's why Bank M&A has been nothing this year. Some of it's the bond marks, but these bankers don't want to sell. Or they see selling it not all-time highs as a sign of weakness. And so I think that's keeping Bank M&A tempered down. my favorite thing about banks is you read the proxies and this is more the community banks that have

gone through the demutualization process but when you read them and they've put in the golden parachutes for the management teams and the directors like I've never seen golden parachutes for directors before I really started looking at community banks and two years ago I was like god these guys are getting paid for nothing but now I read it I'm like oh my god thank God finally a little alignment in this stupid little three branch bank where the CEO is making five $500,000 and the director's making $50,000. And as you said, the Kings of Town, finally they have an incentive to sell. It's just, it's so funny how that incentive.

And look, there's no hostile bank M&A, right? You cannot do a hostile bank M&A. You need to look under. And so as a shareholder, your one hope is that in some way, shape, or form management is aligned with you to either grow tangible book value to create value that way or to sell and let somebody else take your deposit base and grow a tangible book value. The other thing, Andrew, I wanted to mention, like we've talked about. about banks a lot. I would just want to share, like, I think banks are below average businesses, right?

I mean, I'm an investor in banks. I invest in all types of financials. I think there are some really interesting business models within financials, asset managers, alternative asset managers, some specialty insurance companies. I think there are some good growth banks that, you know, will earn above average ROEs for a long period of time with good management teams. But I think the average bank is a below average business. It's very competitive intensities high. I think it's increasing. I think there's, you know, they're getting chipped away by fintechs. I think the very big banks are great, great, they haven't like captured the consumer

business. So the small banks are left with just commercial business. And a lot of commercial business is just CRE. And so it's a very volatile asset class. So I think, you know, I would not say like, hey, let's go invest in the KRE together for the next 20 years. Like I don't think that's a great winning strategy. I think you have to, I think banks are cheap now.

They're cheaper than they are historically. I think that's going to change if we get a little bit of normalization of the yield curve and maybe credits not as bad as the market thinks. But I think, you know, and I think there are some interesting banks that are good growth banks that will compound for years. But like the average bank, I think it's a struggle. And I think that, you know, the deposit flight last year kind of highlighted that. So I just wanted to mention that.

Obviously, it's a deposit plate, but do you think it's also, it's well documented, right? J.P. Morgan, their tech systems, their consumer app, like there's this increasing in the regulatory burden, the tech burden for banks is going up, up, up, up. Do you think part of that is like 30 years ago, the difference between a community bank and, you know, the chase at the time was not that large because you didn't really need the internet presence, like you're regulated? So do you think it's just that returns to scale and that issue that so many people talk about, hey, the U.S., we've got this dichotomy between we have 5,000 banks, but like we're regulating and the systematically important banks have this huge advantage where your deposits are safe there? Does that is that all kind of issue that make these below average businesses these days? Yeah, I mean, I think the big banks have the scale of the branch networks.

Although people don't go into branches as much as I used to, people like that. to know that there's a B of A branch or a Chase branch on every corner. I think there's also scale to advertising, so they feel comfortable with the, you know, they see the ads, they feel comfortable to their banks there. I think for the most part, the consumer banking business has been captured by the large regional and the universal banks. I just think people with means have checking accounts at the big banks. banks or for the most part.

And so I just think the consumer is not in play for for small banks on average. Yeah, they have some, you know, friends and family accounts and maybe if you have your commercial account there, you also have a checking account there. But the average consumer, the middle market consumer is not going to small banks. They're going to the big banks. Well, Derek, I have so much more to ask you about. Jenworth was actually what I reached out to you about that. I wanted to originally talk to you about.

There were lots more questions of regulation, but you've been super generous with your time, and I have a physical therapy appointment I need to run to you. So, Derek, I'll include a link to his Q4 letter in the show notes. If anybody wants to read it, and look, he's the best in financial. So you should be following him on Twitter, following his letters and everything. Derek, thanks so much for coming on and looking forward to having you on again. Andrew, thanks for inviting me. Great to talk to you.

A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.