Yet Another Value Podcast - John Maxfield on Investing in Banks in a Post-SIVB World

Episode Date: March 21, 2023

John Maxfield, Editor of the Maxfield on Banks Newsletter on Substack, has spent nearly two decades studying America's best and worst banks, the history of banking, and interviewing bank leaders. John joins the Yet Another Value Podcast today to answer your burning questions regarding investing banks, his mindset during this "crisis" and how to think about investing in banks moving forward. For more information and to subscribe to John's new substack, please visit: https://maxfieldonbanks.substack.com/ Show notes: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:43] John Maxfield's background and how he got into investing in banks [4:52] Overall thoughts investing in banks right now in a post-SIVB, UBS buying Credit Suisse world [8:43] Blood in the streets in banks vs. other markets[12:45] Why are customers with $10-100M running uninsured deposits in First Republic? [13:55] Regional banks [21:13] How should folks be weighing the risks with regard to investing in banks? [26:54] Catalysts that caused the 1873 crisis; what can we learn from that crisis [29:06] The "everyone needs to chill" model when thinking about run on the banks [33:20] Bank metrics - how KPIs investors care about have changed/evolved [35:25] Franchise risk for banks [38:48] Does what is happening now have an impact on the community banks? [47:11] Bank stocks that look interesting to John Maxfield in a Post-SIVB world [57:47] How do you make $$ as a bank investor buying a bank for 4x book value? [59:47] Generalist interest in banks: what should folks put more weight on when evaluating various investing opportunities (HINT: how did they perform during the 2008 financial crisis) [1:04:38] How important is speaking with management from bank stocks? [1:06:41] Closing thoughts Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less

than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. All right, hello, welcome to the yet another value podcast. I'm your Andrew Walker. If you like 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 on John Maxfield. John is the founder of the recently launched Maxfield on Banks. It's a new substack. I'll include a link in the show notes. And I'll let John go through his kind of fuller,

more wholesome background in a second. But just before we get there, let's start the podcast the way I do every podcast. A quick disclaimer to remind everyone, nothing on this podcast is investing advice. Neither of us are financial advisors. Please consult one. Do your own work. You know, we're going to be talking about a lot of bank stocks today. It feels like bank stocks are riskier than pre-revenue biotech startups these days. So consider that, I guess, extra degree of risk. But all that out the way, John, I'll just turn over to you. Maybe to start, you've obviously launched Maxfield on banks.

Again, link in the show notes. You've got a lot of background in the banking sector, which I think makes you the perfect person to come on and talk today about banks in general. But maybe just real quickly, you could give a little bit of your background. So listeners know kind of what their, your perspective and what they're hearing from. Yeah, sure. So appreciate the invitation to come on, Andrew. Let me start with that. So I'm, I think the best way to kind of characterize me is like I'm a student of banking. I just study it. I study it really intensely. And I've done that for, I don't know, I keep in my head, I keep thinking that the financial crisis is 10 years ago. The financial crisis was actually what, like 15 years ago? You know what I mean? And so like I need to start adjusting that like it was actually fifth. I've been studying it for 15 years. And, and, And, you know, when you study a subject, you kind of go through different aspects of it. And so you start with like, I think in banking, you're tempted to go start with the analytical stuff because it's like the most concrete, which then it's funny because at the end of the curve, you realize that's the least concrete, but that's neither here nor there.

So I did all that. I started writing for an organization called the Motley Fool. I'm sure some of your readers are familiar with the Motley Fool. Then I went and was the editor-in-chief of a band. banking magazine. Then I've been running an organization for the family of a very well-known banker, a guy by the name of Robert Wilmers, who ran M&T Bank from 1983 until he passed away in 2017. And Bob Wilmers was like, he is like this legend in banking. If you take every single bank in the United States and you rank them by total all-time shareholder return, Bob was either

number one or number two. He went back and forth with this guy named McBlodnik and Glacier Bank Corps. So I've done all of that stuff. But, you know, really what I've, what I've been doing throughout the years with at all these different positions is just continuing to like cumulatively add what I know about, you know, banking on top of it. So I start with the analytical stuff. Then I've done, spent a lot of time developing relationships with bankers across the country and spending time with them, family members, their friends, their colleagues. And then I, I just in the past two years, and throughout all of this, I would like read, like, I've been reading history and trying to get the full picture of this thing in my head. And in the past two years, I really, I spent, I really doubled down and consolidated on that, on that history part.

And so at this point, like, I have a pretty comprehensive, I've kind of developed, you know, Charlie Munger talks about mental models. I guess this would be a mental model, but like I have a pretty comprehensive model of banking in my head that is just pieces of like the greatest bank. that I've been able to talk to throughout time, like all the analytical research I've done, all the stuff I've read about like banking going back to the very beginning, like all that stuff put into one thing. And that's kind of what I've been spending my time with. That's great. And you know, you did an interview over the weekend and you were talking about the history of banking, chipping in back in the 17 and early 1800s to save cities and stuff. And I was like, wow, that is some interesting historical perspective. But I guess let's just jump right into it. So

But you and I are talking on Monday, March 20th, you know, over the weekend, you get UBS and CS merging. FRC is in the, First Republic is in the news every day. I think in the interview you said, you were like, look, now is the time a lot of these regional banks are trading at 70% of book, 50% of the book. And you were saying if you just take a historical perspective, now is the time that you kind of want to be sharpening your pencils or buying into banks. Like that is the time when they trade at these levels. I do think people would push back in two ways. They would say, hey, you know, Silvergate, Silicon Valley, all these banks. And we can talk what happens to them.

All of them were trading for half of tangible book the moment before regulators stepped in, seized them and the shareholders are obviously going to get zeroed there. Or B, you know, FRC, as you and I are talking stocks probably at 20. I think last I checked book was like 70. They earned like $10 per share last year or something. I've got the specific number somewhere I can pull them up. But people would say, okay, yeah, but that's mark to mark. That's not Mark to Market book, right? That's a fantasy book where their loans and health

and maturity securities, I think they would have way underwater book value if they did it. So I threw so much at you. I'll just pause there. Like, what are your overall thoughts on investing in banks right now? Okay. The thing to know about like buying and owning bank stocks, okay, is that a really good bank will earn like 12 to 14% on its equity every year. Just bang, bang, bang, bang, every year, every single year. And that is a really good return compounded over many years, right? Because that's, you're doubling every, what, five years, right? The S&P, you know, historically it's what, about 8%, right? So if you're getting 12% and you're getting 50% more,

doesn't sound like a lot in maybe one year. But as you said, you compound that over 10 years and it's absolutely enormous returns on, it's enormous wealth creation. Yeah. Yeah, you double every six years, right? And so it's like, and now, but here's the problem with, that number like 12% like compounded is a really good number but you tell anybody 12% in any given year and they're like well that's nothing to write home about you know and so the problem with bank stock is that like you're not you're just not going to get the ridiculous growth that you're going to get your tech socks that's that you know shoots off or anything like that and so what that means is that if you really want to juice those returns um you have to buy the price that you pay

for the stock really matters, right? Because you're just, you're up against a fixed return schedule, you know? And so really, you know, what you want, as a general, I'm not giving it, this is how I approach it, okay? You, the way to buy bank stock, the way I buy bank stocks and the way that a lot of folks in my kind of realm buy bank stocks is that like, you don't buy bank stocks for a long time, and then you buy a lot of bank stocks at one time. And that one time you buy them is when the world's going, seems to be going to hell. and that's what's going on right now. And so how do you know the world is going to help, right?

How do you know the world is going to help? You know it because everybody's afraid, right? And you can, in this, like, it's not something that you can quantify, right? It's not some sort of tangible thing, but you can just feel it. Like you can see it and you can feel it. You know, you know, Andrew. No, no, I was just going to say, I hear you on, you can't 100% quantify it, but you can look at the VIX and like VIX was screaming higher last week.

Or, you know, I can just look, and I hear you the time to buy it, but it's very scary when you have Silvergate, Silicon Valley, and a signature bank within a week. That's three pretty sizable banks, just taken over, shut down, unwound in a week. And then you've got First Republic, which, you know, maybe not the gold gold standard, but I don't know anybody who would have said, oh, that's a bad bank over there. And you've got them, it seems like on death's door every day. Like, as you said, the time to buy is when there's blood in the streets. But is it scary when there's blood in the streets in the banking market versus when there's the blood in the streets in the oil markets or something, you know? I don't know, though. I mean, like, you go back to like the oil crisis in the 80s.

You go back to the tech bubble. I mean, like, it's this brutal. It's brutal. Like when you go through these things. But like, here's the thing. So you mentioned Silvergate. So you mentioned Silicon Valley. You mentioned First Republic and signature.

So like, if you look at it. each one of those banks, none of those, those are not, these are not ordinary banks, right? Silvergate really was like hardly even a bank, right? It's more of an exchange now. It was more exchange. Right. So just take them, move that one out. That's always been kind of an outlier. So we've been that out of the way. So now we go to Silicon Valley. Okay, what was a deal at Silicon Valley? Well, it too was this very unusual situation where you had all of this liquidity flood into the system after the pandemic. begins. And where does that liquidity go? That liquidity goes in large part, kind of the

tip of that sphere is the tech kind of VC market, right? Remember the IPOs just exploded at the time. In fact, the good friend of mine used to work at a company called Encino. And it was like, I can't remember. I mean, I think they were pricing it at like 25 bucks a share the night before. They raised it to 40 bucks a share. And it came out at like 75. I mean, it was just crazy. And so you had all this money fled in. Well, a bunch of that money, co-collected in Silicon Valley Bank because that's two that bank serves. So it's at the very tip of this liquidity sphere, right? And the one thing we know about liquidity is that when there's a huge surge of liquidity into the system, it never just like quietly exits out the side door.

It bangs its way out the front. And that is what it's doing right now. This is like, this is not the only time that will bang its way out the front because that does a huge liquidity surge, but this is one of the times that it is doing that. So then you go to, then you move to signature. Okay. What was the situation with Signature? Well, Signature had a variety of things going on there, one of which was they got deep into cryptos and into the Cryptos. Signature was almost the hybrid of Silicon Valley Bank and Silvergate, right? Where they had extreme exposure to New York City commercial real estate and they had exposure to crypto plays. And they were that nice little double whammy. That's right. And then if you go back even further in time, they took a whole bunch of losses on the medallions when Uber and Lyft came out and then caused tax to

medallions to tank, like, where there was signature. And like, and they've always had the reputation of flaunting the, the regulators. And so I've talked to bankers, the CEOs of major banks who think that like, it was kind of like the sacrificial lamb. They're like, well, we need another one to go and like, you know, this is, it's going to, these guys deserve to go because they have a little bit. Barney Frank would certainly agree with you that it was the sacrificial lamb. Yes, he would. Yes, he was certainly, which is another irony that that is in all of this because he was on the board. But, okay, but then so you see, so you see, take these ones and then First Republic. Now, First Republic, now you're moving more over into

your normal type of bank, but even First Republic has some unique characteristics, right? You're concentrated in one customer class. For all intents of purposes, the wealthy, I guess two, really, the wealthy and then business. So you're concentrating those two things. And as a consequence of those concentrations, what do you see? You see that you're, I think, what is the number? I think, I think 80% of their deposits were uninsured. Yep. And so you think about that, you think like, well, like, what was it at Silicon Valley? I think of Silicon Valley is like 95% were uninsured.

What was the signature? I would think it was like 94% or 94% were uninsured or something like that. What's going on right now is a run on banks with uninsured deposits. That's just kind of what that was going on there. And with these kind of like other catalysts kind of sparked it, whether it was crypto or kind of the, the, the, the, the, the, the, the, the, the, the, the, down in the IPO in the tech IPO market. So like you go to your traditional regional bank. It's just a different story. Can I just ask a silly question here? Right. So Silicon Valley Bank, there were stories of people with a hundred million, a billion, I believe Circle had

upwards of $5 billion in uninsured deposits. They managed to bring it down to $3 billion before the bank was taken over. But, you know, when I see these massive deposits, I do think it's like, you can just go and sweep it into a money market account, right? And then the, it's no longer an uninsured deposit you you're basically invested in government evils or something like if why are these companies why are customers with 10 20 50 100 million why are they running 100 million dollar uninsured deposits in first republic well i mean sometimes you just need total and complete liquidity i mean you don't want any sort of risk any you don't want it tied to anything whatsoever um and and that's what and also

sometimes you're like you're in the middle of a transaction right you'll park some money here hundred million dollars here because you're to complete a transaction so like that that's the kind of thing that will happen too. But I mean, maybe I've just never been a CFO managing, you know, a multi-billion dollar organization. But it did me. And also maybe just because I was looking at Circle and being like, you had $5 billion in an uninsured account. But yeah, it's just, that was just one of the things that jumps out to me. I do what, let me, so that does take me to another risk. And we come back to this, but the regional banks, right? A lot of them are based on. And for years, the thesis has been as interest rates rise, they have all these deposits.

They're going to be low-cost, sticky deposits. Interest rates rise. Their net interest margins are going expose. I hear you that a lot of these regional banks have a much more diversified deposit bases. A lot of more of them are insured, so there's no risk of them. But is this going to cause, like going forward, banks across the board are going to have lower ROEs because people are going to look a little bit more, they're going to be a little bit more careful with their deposits, right? They're going to say, oh, I can't keep two million dollars uninsured here. Let's just do what I was saying earlier and sweep it into a money market. Or even if you've got an insured deposit, maybe you're looking at and say, oh, I get zero percent interest on

insured deposit, this has kind of caused people to think a little bit that I can go sweep it into a money market or park it in a two-month treasury and get some interest. Like, is this going to affect the go-forward earnings of all these banks, ignoring the risk and everything of immediate blow-up? Well, I mean, so when you're talking about like the deposits in excess of the insurance limit, I mean, you're not talking about like, I mean, there's really that there's a lot of At any individual bank, you're not talking about that's not the lion's share of deposits. Yeah, yeah. So first of all, that's a good thing to keep in mind.

Other than these kind of outlier situations, the other thing to keep in mind is that there are products, what this will probably do, my guess, is that there are products like Gene Ludwig's company that sold an IBM a few years ago that will take, you have $10 million, someone brings $10 million into a bank. well that this company will like take that and they'll go 250 here 250 here 250 here What are my friends runs a fintech that does that apparently yep yeah and so so there are there are ways the system has ways of spreading that so if anything it will raise the awareness about that type of thing but here's the irony Andrew is that like this won't be the problem next time you know what I mean it's like this is like fighting the last war we'll fight the last war but that won't be the next war hey if you look at all the regulations around even FRC and these guys, like the worry was not interest rates rising marks to market. The worry was still, hey, are they going to be suffering, you know, are there assets that are marked at their book at 100 or 90 that are actually going to be worth zero back in the financial crisis? But so what I'm hearing from you is, if I'm looking at a regional bank and one of my concerns is, hey, I was hoping they would be able to do that 12 to 15% that we were talking about over a normal life cycle. I'm worried that's going to come down because they're going to have to pay more for deposits. People are going to be sweeping a lot of their deposit. You don't think longer term that's going to be a concern.

everything adjusts everything adjusts and like the other thing to keep in mind is that we've been through nine major banking crises in the u.s history and we've been through many more minor crises so probably i don't know as many as two dozen crises total when we can put both minor and major ones together and you know what always happens it always goes back to just the way it was you know what i mean just always does and i i've had a lot of people who've been like hey why don't we end up with, you know, the Canadian model, which is, I think they've got just four big banks in Canada basically control everything. They're like, why isn't, why aren't we JPMorgan City, B of A, and choose one other major bank? And why don't we end up with four or five?

It's like, well, that's just not how the U.S. works, right? We've had regional and community banks for hundreds of years. I don't think we're going to have a wholesale change. And if they did try to regulate that away, I think there would be a lot of political pushback because these guys are major players in the local communities. Well, and what you have to ask yourself is, Are there structural reasons that we have that many banks and other countries don't? There are historical reasons, but there are also structural reasons. And what are those structural reasons? Well, you go and you look at a map, where are all of these banks concentrated?

They're concentrated in Iowa, Illinois, Missouri, Minnesota, like Ohio. These are ag states. And so you're flying over an ag state and you look down, there's like all these little like crop circles and stuff like that. Well, those are individual farms. Yep. Farm lending is incredibly bespoke, incredibly bespoke. And like, yes, maybe fintech will someday, like, conquer that, but it ain't close yet. And so what you have is you have all these local lenders on the ground that have to know the farmer, the land, his equipment, like all these different components that you can't feed into a model cleanly.

And so what do you think about why we have so many banks is because we have the best damn land in the whole world. I mean, like, we have the best land in the whole world. Just look at where our country sits on the globe. It's a pretty good deal. And so like when the extent to which the banking industry will consolidate will be a function of, in my opinion, the extent to which the agricultural industry consolidates. Because if the agricultural industry moves all the way down and gets rid of all these individual farms, then that the industry itself will be spreading the risk. You won't need banks to spread the risk, you know what I mean, and know the risk and thereby spread it. So that, that's really will be the thing.

Let me bring one. Let me bring one more point about this. So if you look at the history, so if you go, if you, if you, in, if you have in your mind the chart of the bank population in the United States going all day back to let's say 1800, it looks like it's going low, it's like kind of going along the bottom axis. And then you start, it tips up. It starts tipping up in around 1870s, okay? And it goes way, way, way high up to, and it peaks in 1921 and then tears down in 1930s when you have all those failures in the Great Depression. I think you can imagine what you're of that. Yep. Right.

And then you have a long kind of period where it's flat that's called Great Moderation and then a little tail and then consolidation ever since, okay? And so that little, and so you say, well, so you have, it's basically a big surge in the number of these things. Yep. And he said, well, like, what, what caused that search? Why are there so many of these things? The reason there were so many of these things is because disposable income was born in the United States.

And when disposable income came about, you had all of these deposits from all of these people. And so you had these banks and saying like, oh, my God, look at how much freaking like money there is. So you have all these banks that are opening up and starting up and opening up and starting up. And like we are ever since then, we have been working back backwards from that to kind of, I guess if there's some sort of natural equilibrium number of banks per capita or something like that, we've been working. working back from that ever since 1921. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are.

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spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. let me so look obviously i i hear you with there's blood in the streets now is the time to buy but i do look and i was just looking at some of these over the weekend right like uh what is it western alliance you know their their stock is as you and i are talking in the low 30s tangible book at the end of 2022 was 40 dollars per share they earn 10 dollars per share in 2022 i'm rounding up a little bit but you know so you're talking about buying at three times 2020's earnings uh approaching 80% of tangible book, like those seem great. But then I guess I look at two things. I look at the bank

runs that are happening. I'm like, hey, are they going to be, are they going to lose funding? You know, it seems like it happened Western Alliance. It happened at Silicon Valley. It could happen there. That's A. And then B, I look at their their loans on their books. And if I remember my numbers correctly, they had like $51 billion of loans at the end of 2022. If you fair valued the loans, I think it was about $47 or $48 billion. That's about a $3 billion difference. Guess what? that wipes out almost all of that tangible book. So I look at that and I say, and I'm just choosing one example. We could have chose Pacific West Coast Alliance or whatever. We could have chose several of them and the numbers look similar. But I look at them and I say, they look very cheap if I'm looking

historically, but I'm worried about run and I'm worried about that market to market of the book. So how do you think investors should be kind of weighing those risks? I mean, I think that they should just chill out, to be honest with you. You don't need to mark to market a loan book. There's no, like, why, why marked to market a loan book? But doesn't that sound the same as you don't need to mark to market your health to maturity treasury treasury securities? Well, like you like, okay, so we're in this period, okay, we're in this period of just this irrational fear is where we're at right now, okay? If you take a step back and you say, okay, let's think about this. Like there's a reason they don't mark to market, hold to maturity

securities, right? What's the reason? The reason is because they just let those things like naturally roll off, right, when they mature. And so they get, they get far value when that happens, right? And so like, as so long as there isn't this fear where this causes a liquidity run, then like you don't have an issue, right? But it's just only in this context do we think that this is a problem. So it's like, I mean, yeah, when your interest rates go up as fast and as far as they have, I mean, they've never gone up this far and fast in history. Like, Yeah, I mean, I guess theoretically you could mark everything to market and then all the banks would be insolvent, but like that's stupid. It's just like, why? Just like let the loans pay off. They get them at par. You know what I mean? Like everybody's good. Everybody's whole. You know what I mean?

So yeah, I mean, like I understand the argument, but I also don't understand the argument because it's just like, if humans, they want to find something. They want to find something to be a problem. They want to find this sound smart to be the person who identifies this problem. They want to like be contrary. and all the stuff, but it's like, sometimes when you step back and look at it, you're just like, it's not complicated. This is simple stuff. I mean, it's like, you don't need to market market loans. There's just no, there's no reason to do that. Unless, unless you're going to liquidate that bank and sell all those loans. And in that case, you're not only marking them to market what happens. You got to mark those things way down. Yeah. Because you have the FDIC liquidating them and the FDIC doesn't care. So they'll just liquidate for whatever. I do, I 100% hear to you, right? Like, hey, these loans are probably going to be money good when they're made hold. If the deposit base just stays there, everything's going to be

fine. But on the other hand, I mean, I do think it's something, life insurers do the same thing, right? Life insurers can hold things to market. But life insurers are, they're buying 30-year bonds against the 30-year payout of a life insurance policy, right? So their assets are much more marked with their liabilities where, as you're saying, like, and you're the one who had the confidence as king post, which I really enjoyed recently. I think that was your first or second post. But you're just saying, hey, you need to have confidence in these banks that they're going to be there and then the loans will pay off that par. But it does sound kind of silly to go and say, hey, just pretend that the loans, you know, that all these loans you made at 4% and interest rates are government

securities yield and 5%. Just pretend those loans are going to be made whole because it also, it sounds very similar to, hey, these loans that you've got marked on your book at cost, let's just pretend they're worth costs, even though they're going to zero dollars. It just sounds crazy to have that trust. When they're on a market basis, they're kind of zeroed. I mean, so when you think about it, like the banking system isn't a function of banking. The banking system, how it's structured, is a function of our priorities and society and what matters to us. You know what I mean? So you have fractional reserve lending.

You have like the accounting rules. What are all of these? These are all driven towards facilitating growth, economic growth in the United States. And economic growth is the thing that facilitates our power, you know? it's the thing that allows us to be the global policeman and to finance that whereas like Canada does have four banks but like and like they don't have as many problems as we do and like and they have you know universal health care and all these different things well the reason they can have that's because we're protecting their southern border and they don't got any other borders

you know what I mean so it's like this this is a product of the decisions that this country has made over the years and it's in times like this where you look at it and think like yeah they could be better, but it's in all the other times, which are like the eight years out of the 10, that everybody's like, this works well. Yeah, this works really well. Because the other thing to keep in mind is that like, I mean, the reason you have these expansions and contractions is because of credit, too much credit, then you're going to drop back. Too much credit, got to drop back.

So it's always mistakes, always mistakes, are driving these things. But you go back to like, let's go back to like 1873. Okay, 1873 was a major panic in this country. And that panic then led into, they called it the long depression. And so there's like, that was a bad depression, 1857, long depression, 1893, same thing. And then the Great Depression. Okay. So those are the four major depressions in the U.S. history.

So what happened in 1873? Well, you had, what was the catalyst that caused that crisis? It was you had this company called J. Cook and Company. And J. Cook and Company, this was the guy who basically sold all the bonds in the Civil War. And it was Grant, I can't remember. Appomatics or after one of those major battles, he was something that's effective. Like, we didn't have Jay Cook. Like, the union would not have won the war.

You know what I mean? So Jake Cook is selling all these bonds to finance the war. Nobody thought it could be done. And so then they do that. And so then he gets in real tight with the government. The Cook family are really good. These are really, really, really good people. So they get in with the government.

Then the government comes to Jay Cook and it says, hey, we're trying to shore up our northern border against the British who are trying to come down. right and the we think that one way to shore that up is you want to populate that area and the best way to populate that area is what to build a railroad so they have the northern Pacific well the northern Pacific is having problems um uh like getting financing because you have these railroad booms and bust back at the time and so they could go to j cook who can like finance anything they're like can you finance northern Pacific and he's like what the heck sure absolutely so he finances it well he gets caught with all that stuff on their on their books right when the market takes takes turns his bank failed

there's all these runs. It causes all this stuff that like the stuff we're seeing right now, but like times 10, right? And so then you have this long depression. So then you have to step back and you have to say, are crises worth it or are crises not worth it? That's the question, right? Are crises worth it or a crisis is not worth it? And you know what? We built the Northern Pacific Railroad. And that helps short the lines against the British. And now where I live, Oregon and the state right above me, Washington is ours, not the Brits. In the 1800s, we built the Northern Pacific Railroad in the 2020s. I could get ice cream delivered to my door in six minutes.

I mean, look at the banking system, funding all this innovative growth. So I definitely do hear you there. Let me just ask in a different way. Silicon Valley Bank, you know, I can't remember the exact things, but I think they had 45% of their deposits were pulled in a day when the thing. And that meant the regulators just had to step in, right? And I do wonder, like, in the 30s, you have. had to go a bank run like everybody would be panicking, but you literally had to go to the bank,

wait in a line, and withdraw all your cash, right? So it would be not that a withdrawal and a run is ever orderly, but it would be a little more orderly. Whereas now, you and I right now, we could start on this podcast, a rumor that XYZ bank, I hope there's no XYZ bank that I'm starting, you know, but we can start the rumor XYZ and I'll throw A in there. XYZ A bank is going to have a run. Everybody should get out now. Panic, panic, panic. And if we were successful, I mean, this is what happened with Silicon Valley Bank, 100% with a keystroke, somebody could do it and all the deposits could be gone and day. I guess what I'm wondering is, is your model where everybody just needs to chill?

I completely get that. But is that model more a pre- like internet model, whereas today banks are just more prone to runs and they need to run with, because of that, they need to run with a lot more liquidity. Their books maybe should be marked a little bit more aggressively to kind of fair value accounting, just because if they're not, they're more prone. to liquidity runs. Yes, so just to clarify, my model isn't that you should just chill, but that's just what I would recommend.

No, you were saying the confidence, the loans will pay off, you know, again, but I keep thinking Silicon Valley Bank, like, those were 30-year treasuries. Those would have paid off if nobody had pulled, like, they would have been completely fine, and we probably wouldn't be having this podcast taping right now. Yeah, I mean, so you just have to recognize that there are periods and time where, like, the rules, like, kind of like, oh, all the rules, all the real rules, like go off table. And then it's just, just like the lizard brain.

Lizard brain is driving everything. You know what I mean? And we're in a period where lizard brain is driving everything. It's like fight or flight. You know what I mean? Like there's this huge, all that behavioral finance stuff that's all about this. You know what I mean? And so, you know, if you're a bank, if you fail, to a certain extent, whether even

if you and I started a rumor about XYZ bank and XYZ bank failed. And so like it would be our fault, but it would also be XYZ bank's felt, right? Because, like, you need to build a bank that can survive that because that has been the case since the beginning of time. You've had these rumors bring down banks and all this irrational fear. Like, you're always going, there's always going to be a crisis. There's always going to be a crisis. And you have to be prepared for that. So that, I would say that.

But to kind of talk about your point about kind of the nature of these runs and how that has evolved, the first time we really saw that was in 1980. And with the failure of Continental Illinois, which was the sixth biggest bank in the country at the time, a big wholesale bank based up in Chicago. And it had exposure to the small bank in Oklahoma called Pins Square Bank. They've been buying all these loan participations that Pins Square Bank was selling out of the energy kind of the Permian Basin. And they're the largest purchaser of those. Well, what's crazy about Continental Illinois is that if you look at the earnings, it never lost money. Their earnings went down, but it earned money every single year, every single year. And so what that tells us is that like, and then the federal government, or the FDIC came in and seized it in 1984 because they had a huge run on their deposits. And where did that run on their deposits come from? Big wholesale depositors, principally overseas. So that just happened all at once. So if you are really concerned about this stuff, what you do and you want to buy into the sector, you just,

You can go to the FDIC's website and type in bank fine suite. You go to the bank fine suite, and it has all the data of every single bank in the United States, public and private. And then you can start playing around with the statistics. And you can say one of the stats that they track is the percent of deposits insured. And so you can go and you can get the like the percent's. And you then go find like a traditional bank with a high percentage of deposits insured. And if you want to invest and you're afraid of these types of. of things. That's kind of the direction that I would go in.

You know, it's just crazy because I'm absolutely no bank expert, but I've been following, we've invested in them in the past. I've never heard of like the percent of deposit insured stat before. Like I don't know a single company that was, I probably looked at 30 bank earnings reports in the past week, just looking through this stuff. I don't know, a single company that reported percent of bank's insured deposits. And now it seems to be the most important thing that's everyone's talking about. I bet you next earnings we're going to see a lot of them, but it's just crazy how quickly stats can evolve in something that I'm sure only banking, I'm going to use the term nicely. Nerds like yourself would really think about,

all of a sudden it's the most important thing in the world. It's funny to say that because a good friend of mine runs one of the larger bank hedge funds, a bank focused hedge funds. And we were talking about this the other day and saying like holding all else equal before all this happened. And you had two banks that were identical equal. But for the percent of deposits insured, would you at, would you at that point, before all this stuff got into our brains and like changed how we thought about us, would you characterize that bank being riskier than the other bank? You probably would have. And before this, I would guess you would have lent. You would have gone more towards the bank with lower percent of deposits insured because you would have thought, oh, that bank, they're doing really great with business clients. Like you would have looked at that as a. relationship metric that they're going to have more growth opportunities, loan opportunities, everything in the future. So it's just funny how that would change quickly.

Because you bring up a good point, Andrea. It's like you can read that statistic two ways. You could say, that's riskier because they have fewer insured, where we could say, well, the most sophisticated depositors believe in this thing. And so it's like, so it's just one of those things to your point. It's like, this is the shiny object on the beach at the moment. You know what I mean? And so that's kind of what everybody's going after. you would have thought to yourself, oh, this bank has the potential to be the next First Republic, which trades for 2x book. You know, everybody thinks they're the gold standard banking.

And now that, just sticking out First Republic, I do have a question, right? So I think it's pretty clear whether you think the $30 billion in deposits they got last week are enough or not. Like, I think it's word bailout or something. I think it's pretty clear that there's been a lot of franchise risk there. Like, how do you think about, and we don't have to use First Republic a specific example, But these banks, once they get in the news as desperate, like, how do you think about the franchise value evaporating or their kind of thought process for bailouts? Because if I just took it from one bank in one bank specifically to all banks in general, I know a lot of people have just said, hey, the government has been behind the curve.

And you need to come in all at once and just stop the run in its tracks. And they've been whirl behind there. All of these banks have been well behind. Hey, the answer is not getting 30 billion deposits. The answer is if you're about to put out a liquidity press release, you do it alongside. but hey, we also just raised $50 billion in equity or something, you know? Let me start by saying that First Republic is a really good bank. I mean, it's almost unbelievable that this thing is like, it's going through what it's going through, right?

I had multiple people email and they'd be like, I've never had customer service like First Republic gives me. I love it. Like, I can't imagine leaving them. And I'm like, look, I get you. But at the same time, you know, once the run starts and you look at their balance sheet, you wonder how the heck they're going to be able to do this. I mean, I read, the stat I read was that they lost $70 billion in a day or something like that, $71 billion in a day. And then $30 billion came in from these, you know, this kind of like private sector bailout or I don't know what you know, what do you call it. And so is that enough?

I don't know. I haven't examined their balance sheet closely enough to pine on that particular question. But I will tell you to your point about franchise risk. I mean, like, you know, you never want to like, is somebody in my perspective, you never want to like, you know, feed into this stuff. because people will be like, oh, John knows about this stuff and you don't want to feed into it. And so, but I'll say taking it out of the context of First Republic, I mean, it certainly could survive, okay? It certainly could survive, all right? Particularly if these big banks have its back and make sure that it's got enough liquidity,

it could certainly survive. But from an investment perspective, is that thing going to ever be worth what it was before? I mean, like, are those deposits going to come all flooding back in, like from Chase and stuff like that like I don't know I don't know I would I would I would be skeptical that that would be the case it's not just that it's also if you were a business you know small business large business whatever FRC's whole thing was a yes they were going to make money on net interest margin but they were going to make money by you know having your revolver or whatever and if you're a business now and your revolver was at FRC it would be literal mismanagement to not go and shop somewhere else because FRC gets C, shut down, whatever it is, you don't know if your

revolver is going to be there. And if you need a revolver and FRC's gone, like, so I just have to think like a month ago, they had the franchise where nobody thought about them. Now, if you're a business, I've got doctor friends who are like, I'm under the insured limit, but I was terrified that FDIC takes it and my deposit is frozen for two weeks and I can't make payroll. Like, they're definitely looking elsewhere. I just, I have to imagine there is maybe not, obviously it's a great franchise that got the wealth management, everything. Not saying the franchise is worth nothing, but it's worth a lot less than it was a month ago. And every day that the headline stick out there, it's going to be worth a lot less. We've talked regionals a lot, right? First Republic,

PAC West, Western Alliance, all that. What if I drop from the regionals to the much smaller guys, you know, the community banks and that sort of stuff? Does what's going on now have, of course, it's going to have some impact on them, but most of that is going to be insured, you know, mom and pop deposits. Is this going to have any impact on them or are they kind of just like sleep at night, safe banks? Well, I mean, what's interesting about this is actually a really, it's a hot topic right now because what you have with these big banks where basically all the deposits are insured to these big banks for all intents purposes, right? There's an implicit guarantee of all the Yeah, they're not going to let JP Morgan go under. They couldn't. The economy, we'd be in a massive

of global depression, everything would explode. We'd be talking about buy guns and gold and hunker down. I mean, the fact that Citigroup is still here today, after 150 years of stepping in the middle of every single crisis that has occurred is a testament to that fact. But, you know, Credit Suisse might take issue with you saying Citigroup is the one that stepped into every crisis. But aside from that. Yeah, I would have to, I don't know the history of Credit Suisse as well, but like, I mean, I could go. I can literally go back to like the early 1900s and just walk through city. It's just like every, they lit, they lent money on sugar in Cuba, then that went south.

And then they were lit, then they did all that stuff where they were like, you know, I'm just like every single thing that they're right in the middle of. But so our little banks, okay, so this is a good question. Let me, let me answer it this way. So my and my family, my wife and my family is balance sheet. About 60% of it is investment in a community bank, private. And we have known these people for four generations, the family that runs this bank for four generations.

We've been invested with them for four generations. They just, I mean, it's just like consistent, consistent, consistent performance. It's an ag bank. It knows the area. It knows the land. It is the dominant bank in that market. It's expanding out kind of slowly kind of in and around the area. It's in Nebraska.

and it just 12%, 14%, 10%, just right in and around there, every single year on its equity. It's just totally, totally, totally consistent. So there, and there are models. You go down and you look at Ross McNight down it. It's called Interbank down. They're based, well, they're based, I think now officially the bank itself is based in Oklahoma, but the holding company is based in Texas, but it's run by this guy named Ross McKnight.

And these guys, this is a crazy model. they have zero securities on their on their balance sheet zero dollars for the securities on the balance sheet okay it is loans and cash loans and cash that's it that's all that thing is and like now you're like god that's brilliant you know what it's like what has happened but it's like again ross's bank just every year consistent consistent consistent consistent it's run the president of that bank is a guy named c k lee just a fantastic banker and so just consistent consistent consistent there's another bank up in oklahoma that is run by it's owned by by Aaron Graft Aaron Graft is a CEO of triumph. It's owned by Aaron Graff's father and a business partner. They went in and bought this

bank in the 80s when there was the energy crisis and they got this thing for pennies on the dollar from the FDIC. They've just been running it ever since. Now, they haven't been tacking on additional banks whenever they have the opportunity like Ross has. Ross McNights has grown his up to like $4.2 billion. They've gone much more slowly. They've just kind of been happy taking what they've been given. And like they earn a couple million bucks every year. A couple million bucks every year. So it's like there is a ton, a ton of promise in little banks still. You can still earn great, great returns, great returns. But the fear that in the market right now is that because the implicit guarantee of these big banks,

that puts all these small banks at a disadvantage, right? And so then like the rational thing is to take your money over, particularly if it's not, if it's above the limit, take that money over into one of these big banks. Yep. But what I would say to that is that that argument has been made after every single crisis. And again, it all kind of goes back to normal. Do you think the FDIC needs to, I mean, there have been the calls just raise the raise deposit insurance to just basically all deposits.

Do you think the FDIC needs to do that? Or are you worried about the kind of adverse consequences of that in the long run? Well, I mean, I was talking to a good buddy of mine who runs this fantastic bank. And we were exchanging messages the other day about this very thing. and you go back to kind of the beginning of when deposit insurance the arguments around deposit insurance

really started gain momentum in the 20s and the really good bankers were like, we don't want that. Like we want some differentiation. Like you want that differentiation. It's like, are there we're capitalists or not capitalist? You know what I mean? It's like, again, it's kind of one of those things

that you have to decide. You know what I mean? Like are you going to like, you know, like do you want differentiation or do you want everybody to be the same? I, you know, it's, it's, it's, it's, it's, it's, it's, it's, it's, I definitely hear you, but I do think we've also come into the point where finance is so complex. Like, you don't want, like, let's just go to one extreme. Do you want FDIC insured deposit at zero? I don't think anybody wants like, my

grandma going and checking, having to check like bank hall sheets to figure out what, to figure out it where she should park her deposit money, right? So I think we've said that's not going to be the answer. And if that's not the answer, like having the 250,000 limit. Where anything above that, like, again, I look at circle $3 billion in deposits at Silicon Valley Bank and they couldn't read the balance sheet there. It seems a little crazy to me, but it does seem to me like once we've gone $250,000 limit for everyone, except for the giant, giant guys have implicitly unlimited. It seems like we've just decided as a society, hey, deposits will get made whole no matter what. Let's not have this thing. It's like when I go to a grocery store and I grab a box of cereal off the shelf, I don't have to decide, hey, is there rat poison in here or not?

I can decide if the sugar content's too high, but it seems like we've decided when you go park your money to bank, you don't have to decide, hey, am I taking risk here? It's kind of like the zero. You're not going to get killed in it. Yeah. I mean, yeah, I mean, it's one of those questions like, like I don't know the answer to this question. And I thought about it and I just don't know. Like, do you have a limit or do you not have a limit? Like what or do we have a limit right now? I mean, like do we, maybe we don't have a limit right? I think we're increasingly close so we don't, right? Because you bailed Silicon Valley Bank out and there would have been a lot of crypto startups that lost a lot of money if you didn't. And if you're going to bail out the crypto startups, it seems damn sure like you should bail out my grandma if she loses her money. But then. you think about it, then you think about like, okay, well, does that put us into like an Ireland situation in the financial crisis? We have to come into rescue. I mean, you know what mean? Or like the, I can't remember if it was Finland or Norway is one of the, the Scandinavian countries, that same situation. It's like, I mean, there's a given a take to all of the to all of these things. It exposes you to a lot more liability from government. But like, well, hell, maybe it doesn't even matter. Maybe we have too much debt anyway. So like,

what's a little bit more on top? I mean, like, you know what I mean? Like, it's a, it's a, it's a great, it's a great theoretical question. But again, it's only one that we ask in these short little periods of time where fear is, is the kind of the prevailing emotion as opposed to, as opposed to greed. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide

competitive rates on expert call services, and you can even have an experienced byside analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. When I read that we started this podcast off and I think the way you generally said it was, look, there's there's blood in the streets. The time to buy banks is when they're

trading under tangible book value. You want to be greedy when everyone's fearful, all that type of stuff. This is not financial advice. But I, I know you went on Sunday brunch and there were a couple of stocks you liked. I just want to ask, are there any that you think if researchers are interested, if listeners are interested in doing some research and getting up to speed on banks that look interesting in the wake of the sell off, any in particular that would come to mind? Yeah, okay. I'll just kind of go through my favorite banks.

And so it's important to appreciate that. So I've done an enormous amount of research. And I've been able to kind of reduce all of my research. is focused on reducing, and I've gone to different subject matters in this way. It's reducing that subject matter. It's like a simple thing and that you can then pack away and then just many years ahead, you can unpack that. And so that's really what it's been about with banking is taking me a while to get a lot

longer to get to that point than I expected. But where I came to is that banking, the best way to think about banking is that banking is a business of abundance. It's about managing abundance. Most other businesses are about managing scarcity. Okay. Yep. when you manage abundance, when it's about managing abundance as opposed to scarcity, that requires a

different set of skills, the different skill set, right? And so what is the underlying variable that allows somebody to succeed in an environment where managing abundance is a primary constraint? Where I think, what I have, where I have come to settle is that it is the acquired, the innate or acquired immunity to avarice and envy, okay, to greed and envy. And so that's because when you're in a situation where managing abundance is like the primary constraint, you can just go grab it all right now. Yeah. Right?

Just go get all that. Let's just sit in there waiting for you. You just go get all that. This is the more, the thing every investor knows is the scariest thing in the world is a fast-growing financial institution. Because it looks great on the way up. And there's, as you're saying, you can get as much of it as you want. And then two years later, the chickens come home to roost when all those loans that you wrote are zeros. Right.

Darling's become pariahs. That is just every time. Darlings become pariah. Darling's become pariah. It's just the story of banking is a story of finance, right? And so you say, well, who can operate in those environments? What's these people with these, these immunities? And so then what you realize is that where can you ascertain

whether or not people have these immunities? And that's all in the personal, it's who these people are. You know what I mean? You have to assess who these individuals are. And so I have spent a lot of time getting to know these people on a very personal level. And then you step back and you think about them all in your head. You think, okay, like, you have all these people and all these kind of like vague and tangible

things that like seem to like tie them together. Like, what are those things? And so that that's kind of my assessment of this. The numbers don't, it's kind of your point about the market to market. The numbers don't really mean anything, right? It's like they don't really mean anything. You know what I mean? It's like, they do, but they don't.

You know, it's like you certainly shouldn't think that they do, but you certainly need. they stand for something. You know what I mean? As you said, like, look, you could have the best loan in the world, market at par. It sounds great. But if all your deposits pull and you have to sell it in 20 minutes, like you're probably not going to get parper. You're probably not even going to get 90% for it.

Or maybe like dinosaurs come back and they like eat up the guy who like has had to make the hell of the heat death of the universe is approaching at some point on an infinite scale. Everything's a zero. Yeah, exactly. And so it's like, you know, the banks that I like the most. are the banks with the best people that run them. And there is a correlation between performance and these individuals.

So these are the best people that I believe in banking. So Patrick Goggin and his dad, Bob Goggin, at Hingham Institution for Savings, HIFS. Now, they've been caught in a spot because of their funding structure, but they're through that. And the thing that when you talk to Patrick about this, he knows history so well. And he knows, he's like learned all these different schemas through like through time and what not to do and what to do. And the thing that Patrick Goggin knows is that when you go through a period like this where things get scary, the temptation is to do too much is to change your business model, do this, to do that. When reality, you just need to sit back, chill out and just let it go by. It's like when you're trying to get out into the ocean, when you're swimming out to the ocean, you don't like struggle with the wave.

You go like under the wave. You know what I mean? Like you just chill and go under the wave. And that's what Patrick and his dad know. So HIFS, that's terrific bank, terrific long-term returns in that thing. Aaron Graft at Triumph Financial down in Dallas, Texas. Aaron Graft is like, it is, you know, I've met most of the top folks and spent a lot, spent considerable time with them.

And Aaron Graft is unique even amongst them. Just the way that he thinks, the things that he does, it's very, reminiscent of a guy by name Andy Beale. Do you know, you probably, have you ever studied Beal? Oh, yeah. Oh, yeah. Really? Value investing circles, he is probably the most popular person. There are lots of people being like, why, right now, I bet Beal's, he hasn't done anything

so far in the past two weeks, but his bank sits on a lot of other things. There's a great, great article, and this is what probably made it really famous on him with, have you read his story about poker? I think it was in Vanity Fair or something. Yeah. I mean, just absolutely next level. Absolutely. But anyway, triumph back. Okay. So what Andy Beale does, he, he, it's the balance, what's so brilliant about Andy Beal is that he expands and contracts the balance sheet like an accordion.

Yep. That is ludicrous. It's so dangerous. But man, if you know how to do it, whoa, those things can fly. You know what I mean? Because you can bring in all those. You have unlimited source of funding, basically. Yep. You know what I mean? Because you bring all those. As you said, managing abundance, right? It's managing abundance. You can get as much funding as you want, as quickly as you want by go out and take. CD rates. Everyone else after three. Offer 3.25. You can get as much as you want. And Aaron Graft is the closest to Andy Beal that I've ever seen in the banking industry.

And I think, and when Aaron's funny because when Aaron, he was 30, when he bought Triumph, it was back at the day it was called Equity Bank. When he bought it, he was going to run it like the Beale model. And it's funny because the predecessor, the guy he bought it from, he ran into trouble, was a Beal protege. I think he fancied himself a protege more than he actually He was a protege. And he kind of like ran it into the ground trying that model. But then when Aaron got the bank, it was too late. They'd missed the, they'd miss the opportunity.

It took too long to convince regulators that a 30-year-old would be able to raise $45 million and buy this bank and get that thing up and off the ground, that they missed the opportunity to buy when they needed to buy. But like, so he's a guy, trying to financial. What they're doing is fascinating what they're doing. And I think it's my opinion that it's going to work. And what they're doing is they're basically rewiring the payment system. system in the trucking industry, which equates to something like 8% of U.S. GDP.

So it's a huge opportunity, an enormous amount of success. And they are beyond the point where they need to prove that it's working. It is working. Now the question is exactly what the economics will look like. So he's one. Buddy Mine runs, his name is Brent Beardall. He runs a bank up in Washington called Washington Federal. Washington Federal, again, this is one of those banks that has not a lot of CEOs.

One of the great things, one of the things you want to look for at these institutions is, are there CEOs coming in and out all the time? If there are, what happens when you're switching between these 10 years or these regimes is that you'll have this institutional knowledge will leak out. Institutional knowledge in banking is really important. You want to retain that as much as possible. So I think they've had seven CEOs since it was founded over like 120 years ago, or around 120 years.

I think it was founded in 1907 now to think about it. But Brent, he, you know, this is another bank that gets kind of how this all works. And you just got to chill out when all these things are going on. And they've had an exceptional return. So that's one. Another one that I really like is first financial bank shares. Have you heard of first FFIN? No.

FFIN is run by guy named Scotty D.Ser. I love Scott. And like it's in Abilene, Texas of all places. Have you been to Abilene? I have not. I've been to Texas a lot, but never's Abilene. Have you never, have you never driven west of Dallas? I have.

So I'm from New Orleans and we've done some. road trips. You know what? Maybe the west of Dallas? I'm going to say no. I'm going to say no now that I think about it. The West Texas, man, is like, woo. I mean, you start driving up there and it's like you drive, what, 50 miles and there won't even be a stop. Yeah. Yeah. And there's, yeah. And so it's like, man, and that, that is like right on top of the Permian Basin. Avaline is, really, Abilene is a little bit off the Permian Basin, but it's like right in that region. And boy, when that, that oil crisis hit in the 80s, I mean, like all those banks failed. for First Financial. Not only did First Financial not fail, it actually earned money through the whole damn thing, which is crazy. And Scott and I were, he's been telling me all this stuff for all these years. And one of these, he was telling me, we've earned money every year since we were founded in 1890s. He told me that I probably told me that a dozen times through the years. So finally last year I said to Scott, I said, Scott, it's time to put your money where your mouth is. We need to get that data, you know? And so he went to get the data and he put two of his people on it. And so they spent a couple months digging it up through old books, through old like board books and stuff like that. And,

And he comes to me and says, well, John, we've got it pretty much wrapped up. We're just missing one period of 15 years. I said, well, it's a pretty long period. What years are those? He said, well, it begins in 1929. I said, well, I'm probably going to need to get those years. He's a great depression. But he, so they go to the OCC and the OCC is able to firm up that, yes, indeed,

they have earned money every single year since 1890, which I, as far as I'm aware, it's the only bank of the United States I can say that. And so it trades for a huge valuation because it's so consistent in terms of its performance. And by that, I mean that the standard deviations, the volatility of its performance in any given year is smaller than any other major bank. Let me ask about this one. This is a super small one, right? It's super, super small. So listeners should just keep in mind not only is this bank and everything, but this is wildly small.

So they should keep that in mind. But I'm just looking at this. The stock trades for 30 to 31 tangible book value there. is six or seven and book value is eight or nine. Like what that's a massive valuation for, you know, Silvergate and, uh, Silicon Valley traded for three or four or ten times book for a while. Obviously this is different, but you look at that valuation, say, hey, how are you going to make money as a bank, as a bank investor buying a bank kind of for four times book value?

Okay. So it's actually not that small. I think it's, aren't they like 14 billion in assets right now? They've got 140 million shares outstanding, $30 per share. So that would be what, call it $5 billion. market cap? Yeah. Yeah. I mean, that's insofar as banks go, that's not that. It's not like a billion dollar. I think I was looking at the six number next to 140, but even that wouldn't be that small. Yeah. Yeah. It's a decent size. Okay. So how do you make, as Scott and I were talking

about this just the other day, like when you think about the value create, it's created a ton of value over the years. Okay. And it's been trading at these valuations, these three to four times book for 15, 16 years, okay, consistently. So what, how do you catalyze value in that situation? Well, you capitalize value by using your stock to buy other banks. Your stock is trading for three to four times book for buying a bank that's trading for one book or two times book. And like, you can really capitalize value when you do that. And we were talking to this, Scott, how much of you, the value you've created, he's been the president of that bank since 91 or something like that. It's a long time.

How much of value you've created is a consequence of all the mergers or the acquisitions you've done? And he said, I don't know, but it's the lion's share. And so what that, yes, you are buying at a high valuation, but that high valuation is a, is a currency that Scott and his team uses to go out and buy these other banks to catalyze that value. You know, I do hear that. This probably gets into a more overarching conversation. It's like, hey, if you've got a company that's great at acquisitions, like how do you start valuing them? And it's really tough because if the way they're creating value is issuing stock at four to go buy stock at one, like it is a weird cycle. But let me, let me switch from there. I do want to. You've been very generous with your time. I do want to ask two last questions before we wrap up. The first one is, look, generalist interest in banking has probably never been higher since 2008, right? I got four text messages from people who said, hey, I'm going to open the last week who said,

hey, I'm going to open up the Credit Suisse 10K and really dive into if there's an issue here or not. And I was like, look, if the governments didn't know a week ago that there was an issue, I'm sure you spending 20 minutes in the 10K is not going to reveal an issue. But just in general, a lot of interest in banks, right? People are going to start digging through and they're going to say, hey, I want to buy some banks, as you said, blood in the street, I want to start buying banks below Tangible Book. Or I just want to get a feel for how banks are doing because I'm worried we're going into another 2008 period, right? What do you think when generalists are looking at banks? And let's say, you know, what is it in law, like an expert of reasonable knowledge?

Like, we're not talking somebody who doesn't know how to rebalance itself. But when generousers are looking into banks, what is the one or two? things that you think they don't put enough weight on that you think they should be thinking about going forward? So my, the first thing that I look at when I'm looking at a bank every single time is how they perform in the financial crisis. It does not matter how they perform in the good years. Doesn't matter.

That tells you virtually nothing. In fact, it can actually be a red herring. Yeah. What matters is how they perform in the crisis. So Lehman was 20% ROE every year until they went until they went to zero, right? that's exactly right and so go back and look at the financial crisis look at how us bank did look at how p and c did look at how b b and t did like look at that's what you're looking for and so then in those cases like you say okay well if i want to buy bank stock and like

i want to use that as my litmus test like then you say well u.s bank did really well they merged with the highest credit rating in the entire industry even higher than jp morgan then what you have to ask yourself is is the culture and is the the philosophy at the top, still the same philosophy that got them through that thing. And in U.S. Bank's case, I would argue that it is because the CEO, Andy Cicere, was kind of a right-hand man with Richard Davis for many, many years. And they both grew up under the Grunhoeffers.

Grunhofer's grew up under this guy named Harry Volk at this bank, the Union Bank. And my son just stole my hat. Union Bank in California. it. And so it's like, it's the same philosophy. And so like in a case like that, you'd look at that and you say like that, that seems probably pretty safe, pretty safe one. So just investors who are thinking about looking at individual banks now, as you said, go look at the financial crisis. If they were taking markdowns left and right, you're probably there's probably some, even if their balance sheet looks good. Because as you said, it's just numbers. They mean something until they don't. They might look good until next week. They're saying, hey, we're writing everything down. That's really the thing. Anything else investors just general should be thinking about when they're looking at these stocks? I mean, you have to approach investing in banks with a healthy dose of humility. That's what I would say because like you get out there and you know, what's that, what's that curve?

It's the confidence and the knowledge confidence or whatever. It's the one where you learn a little bit and you feel like you're the most confident and then you learn a little more and you feel like you know absolutely nothing even though you probably know five times as much. Yeah, I know exactly the one you're talking about. So this is, it's like that. I mean, you see it. You see people talking about valuations.

and numbers this, numbers that, and blah, blah, blah. Like, as soon as people start throwing that stuff out to me, I'm like, it's like, it's like my brain just like shuts down, but taking any information from them because you realize that they probably don't know as much as they think that they do. But what I would say is that like, that makes it really more complicated, right, that the numbers aren't as clean as easy to understand. But it also makes it a lot easier, right?

Because what you need to do in this situation, when you're investing in banks, you just assess the individuals that is running the bank. Like, just assess them. Like, does he give you a good feel? She or she give you a good feel. Like, do they seem like an honest person? You know what I mean? Does their past lead you to believe that they will have success in the future?

Like, make human decisions, make human observations. Like, that is where that's going to put you in a better position than trying to discern some sort of like pattern out of some numbers that could be entirely made up, you know? So that's what I would say. I was going to ask you, and I guess we'll wrap with this. But when you were talking about banks earlier, you were saying, look, I like to invest in the banks where I know the people, I've got a lot of trust for them and everything. I think everyone would prefer to know everyone they investment and get a lot of trust in them, right? But like the simple fact is, especially for generalists, but for most investors, they're not going to be able to get Jamie Diamond on the phone and learn Jamie Diamond. Now, you can probably learn a lot about them through the press.

But, you know, if I'm looking at a cable company, I unfortunately can't get the CEO on the phone with me. But in banks specifically, do you think generalists who can't develop relationships with these bank CEOs? Do you think they just need to throw banks on their do not invest list because they're not getting that human contact with them? Or do you think they maybe can just get a feel from it from, as you said, going seeing how the bank performed in the financial crisis, reading their earnings calls, getting to know them just through that. Or do you think you really need that human sector specific focus, hearing all the scuttle butt throughout the industry? So, like, if I were to show you, like, when I go in and talk to these folks, my outline, that I'll go in with an outline that's 50 pages long or 40 pages long. And, like, 30 pages of that will be genealogical research on the CEO.

Who's his, and, like, who's his dad? Who's his mom? One of the first questions I ask is tell me what your parents did. And then I'll go off on that for an hour. We'll talk about their parents for an hour. like you mean trace i i i can't tell you how much time i spend doing genealogical research now it's it's almost crazy but that like you can find out so much from somebody from like ancestry com and just google searches and newspapers dot com like you can really start to draw a picture

not only who this person is but who this person's family is what the experiences the things that they have seen and those those are the things that will lead you because what you need is somebody who's going to make the right decision at the right time yeah and typically it's when you're everybody else is trying to force you or pressure you to make the wrong decision you have to say does this is this person going to be able to identify the right thing to do and then stand up the pressure that to not do the wrong thing and that's where this comes from you know what I mean like this this history the nature or the nurture element like that's that's you know and I didn't know it's not what investors want because it's not like some easy thing that you can just put in an

Excel spreadsheet but the because it's not easy that's where the opportunity is is. Yep, you completely hear that. Cool. Well, John, you've been super generous with your time. Any, I think we've covered just about everything I had. I mean, we could have gone off on tangents for hours and hours on this. Your genealogical tangents, anything we want to, but anything you want to leave listeners with before we wrap this up? Well, I mean, just self-servingly, like, you know, you mentioned that I just started a substack. There's going to be link in the show notes. Anybody can go check that out? Check me out. Check me out. Check me out on Maxfield on banks, on Twitter. But this, I'm going to be rolling out a lot of

research that I've done over the last 15 months, and it's really fresh research. I think it's, it is, I talk about banking in a way that is different than I think most people talk about banking because of the genealogical stuff, but I think that if you are interested in this space, I think you will really enjoy kind of the mental exercise of kind of going through and looking at them at these things in that way. And so I would just say, you know, like, come and check the stuff out. And if you don't like it, if you disagree with anything, like let me know and I have a pretty thick skin so great well I am I am looking forward to the post going forward again there'll be a link to it in the show notes for anybody it is maybe the best

time subsdeck launch of all time the only thing I think could have been hotter was maybe if you were a biologist launching in February 2020 or something it might have been a better timing but side from that I can't think of a better time to launch a substack but john appreciate you coming on and maybe looking forward to having you on stock banks again in the near future yeah you're awesome Andrew. Appreciate it, man.