Bank Strategy – 2017/2018 Review

During the 2007/2008 financial crisis, bank stocks were one place many investors fled from – like herds of lemmings.  I can’t say this was unreasonable as these companies sustained blow after blow – some deserved and some not.  When a company such as Lehman collapses,  mortgage  GSEs are federalized and mortgage lending comes to a grinding halt one has to consider the Chicken Little scenario – is the sky really falling?  From this systemic failure emerged a new dawn on the heels of legislation, notably Dodd-Frank.  Though far from perfect, this bill in 2010 established a floor from which the system could be rebuilt.

To paraphrase Warren Buffett, my view was this fear and dysfunction presented an opportunity.  With the dust beginning to settle, in early 2013 I dipped my toes back into Financials.  With the exception of Prosperity Bank (PB), which I classified as a Core position at that time along with a few others, these holdings – peaking at about 32% of the total portfolio in aggregate – didn’t exceed the 1% threshold individually.  Financials currently hold 29.9% and are trending down.  Truth be told, this group did provide the octane enabling my portfolio to consistently exceed the benchmark.

The Dividend Diplomats employ a similar small bank strategy but our approaches differ.  Whereas their baseline is the dividend screen process, I rely more on size and geography.  This is due primarily to embedded distortions in a TARP (and post-TARP) world as well as historical factors regarding bank failures.  For example, Lanny’s Isabella Bank purchase wouldn’t make it onto my list as I consider Michigan banks inherently risky due to the number of failures within the state during the last crisis.  You could posit a macro versus micro view in our perspectives.

Since I began this strategy I’ve periodically reported my results with my 2015 and 2016 reviews.  I was remiss earlier this year as the pace of significant mergers decreased in the post-Trump world.  This activity is now accelerating due to two factors, I think.  The first being the Dodd-Frank modifications enacted in May making it less onerous for banks of a certain size to combine.  The second being rising interest rates.  This one is less obvious as rising rates should be a boon to banks.  However, the spread between long and short rates is compressing (perhaps inverting soon?) which is where much of the profit is derived.  So the results, please?

Bank Strategy
2014 6 1 2 21.9% 41 positions
2015 16 3 0 38.7% 49 positions
2016 8 2 0 13.8% 58 positions
2017 16 1 0 25.8% 62 positions
2018 15 5 1 19.23% 78 positions

Note: through 7 Oct 2018

Of interest is that the majority of 2017 was mostly a year of consolidation with smaller banks (usually thinly traded or private) being acquired by one of my holdings.  2018 is interesting in that a number of mergers have a cash component which adds to the complexity of determining the ‘real’ valuation resulting in some initial pricing or recommendation assessments by firms on Wall Street.  I bought into two of these before the assessment changed in my favor (resulting in an unanticipated unrealized gain).

Now that this sector is pretty much fairly valued unless some compelling opportunity presents itself I’ll hope for some of the remaining 73 to be acquired and place my cash elsewhere. 🙂


6 thoughts on “Bank Strategy – 2017/2018 Review

  1. my bank strategy at this point is buying an index of banks 🙂 with the technology disruption like Venmo, paypal, Square, etc. Banks might do a lot of buying up small banks like back in the early 2000s. We’ll see though. 🙂

    I haven’t bought much stocks lately, everything is through my 401k for now.

    Warren Buffett predict another crash like 2009 will happen again, but he’s still buying and doesn’t seem to care about it too too much.

    Liked by 1 person

  2. At current valuations ETFs may be the best alternative 🙂 Most of mine were bought in 2014 and 2015 before the prices skyrocketed. Recently I’ve been playing the M&A angle on mispricing with three of my last four in the money (double digit gains). The other is down 3%. But that requires some work.

    SQ filed – then pulled – their application to become a bank … the other fin techs seem to want to partner with banks for the moment. I suspect M&A will begin moving up the food chain with small ones now and super-regionals next year. I doubt we’ll see any big ones this cycle.

    Too bad about the server – still planning on tournaments?


  3. I’m curious, what are some of the stocks that you hold in this sector? Looking at your 2015 report, I see youre trying to get potential mergers. I’m assuming that skyrockets the stock price of the bank who gets acquired? Sorry, I’m new to this approach and am trying to learn.

    Liked by 1 person

    • Generally – but not always – the acquired bank gets a premium, the usual exceptions being the banks’ health and reverse mergers. The easiest method is to look for mutual conversions less than three years old as many get absorbed at the three year window. Three Massachusetts banks hit that window recently with EBSB still waiting at the altar. LTXB on their recent earnings call stated they were cleaning their balance sheet to either acquire or be acquired. I’m also looking at small banks that will be potentially impacted by JPM’s decision to expand their footprint. Although I doubt JPM would be an acquirer, their actions may force smaller banks to combine.


  4. Very curious about your strategy, would you mind sharing a couple stocks that you’re in now? So, you buy based off region AND potential for the bank to get acquired, correct? I was looking on your previous reports on this, and thought this was an interesting strategy. I didn’t know small banks got acquired that often.

    Liked by 1 person

    • I stay in the eastern US and generally the Northeast US (MA, PA, NY, NJ) that had the most mutuals that converted to stock companies usually in a two-step process. BNCL had their IPO in 2015 and are pending take out by WSFS. ORIT IPO’d in 2010 and are still waiting – the concern here is their portfolio of multi-family housing. So they return part of their excess cash via special dividends. Size is another factor as $10 billion seems to be a number separating acquirers from the acquired. Texas is hot right now with oil booming. I also review recently announced mergers to identify possible mispricing in analysts opinions – sometimes happens in cash + stock transactions. The beauty of this strategy is even when you’re wrong there is limited downside as I generally invest in dividend payers – so some cash accrues while I wait.


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