A comment thread on a recent post cornered part of my thought process recently. I realized that I was assuming a baseline of knowledge of the audience. For newer readers and newer investors, my apologies. To that end, the questions raised by doptionsseller are worthy of greater elaboration. I won’t dive into the history as the basics are generally known to all – The Financial Crisis decimating the industry from which new regulations were formed. Regardless of your personal view on regulation, I’ve found over the years that with an understanding of the rules the game can be played more advantageously. The following details a portion of my thought processes and the evolution my strategy has experienced.
THE TARP YEARS
In 2009, the FASB changed the rule on mark-to-market accounting with the result being renewed investment in financial institutions. In 2013, I started reinvesting in the sector with banks that refused TARP – taking security over uncertainty. All the while I kept my eye on the TARP recipients and in 2015 began investing in some that had repaid the government. I also looked at some that were unable to repay but shied away as the bulk of the paper was auctioned by the government to hedge funds, one being Hildene’s Opportunities Growth Fund II.
Some, like Blue Valley Ban Corp (BVBC), bought out the hedge funds preferred stock due to relatively onerous terms (5% rising to 9%). In recent news coverage, they’re laying claim to victory. While I concur great strides have been made, they still don’t pay a dividend and have a looming balloon payment due in 2020 (on a current 5.25% variable rate note). In my opinion this is a company limping along the right path but looking over their shoulder for the next economic downturn. Others have yet to repay the respective funds. Either way, this space carries more risk than I’m willing to bear.
Dodd-Frank Stress Tests (DFAST)
With the advent of DFAST, I realigned my methodology to conform with these standards with conventional wisdom being consolidation was a foregone conclusion. The ranges being assets < $10B, $10-50B, $50-250B and $250B and over. In 2014 most of my investments were in the $10 – $50 range. As I realized banks had real costs associated with breaking the $10B barrier, in 2015 I migrated more into smaller asset sized banks. The one rule I have (which I’ve broken a few times) is that a dividend is paid to compensate my patience. This bucket is the majority of my bank holdings.
In late 2015 I found another investing angle. Similar to an IPO, thrifts converting to stock companies are called 2-step conversions. The first being the sale of stock to their depositors and the second a conversion to a full stock company. Flush with cash, I’ve seen minimal downside. Patience is required as there is a three year wait (by law) before they can be acquired.
Courtney over at Your Average Dough invests in some conversions but takes it a step further by becoming an account holder first. Trickier but more lucrative if you guess right.
Another opportunity is subsequent with an merger announcement. There are times when analysts waffle on their decision to recommend – or not. BOKF’s recent acquisition of CoBiz is one example. It was two days before analysts determined it was a good deal. Meanwhile I picked some up before the price went up. Cautionary note: The reverse can be true as well.
As you can see, there are multiple ways to play the game and my approach has changed with the times and as my knowledge/experience increased. This type of investing is not for everyone either. Only a portion of my portfolio is handled in this manner. But if success arrives the gains can be stellar!