Andrew Walker:
This episode is sponsored by tegu, the Future of Investment Research. From the beginning, Tegu 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 tegu 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. Tegu 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 tegu.com/value. That's T gs.com/value. Alright, 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 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 Derek Palecki. Derek is from, well, Derek, are you the CIO Eric Gator or what's the official title?
Derek Pilecki:
Yeah, I just call myself a portfolio manager.
Andrew Walker:
Portfolio manager at Gator. Well, Derek, thanks for coming on.
Derek Pilecki:
Yep, thanks for having me.
Andrew Walker:
Look, really happy to have you before we get started today, just want to remind everyone quick disclaimer, nothing on this podcast is investing 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 advice, please consult a 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, as we sit here March 12th, how are you thinking about the financial sector day? What's most interesting on your mind these days?
Derek Pilecki:
I mean, I think that the way the sectors 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 changed the narrative for the whole sector. And so 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.
Andrew Walker:
So I guess on the names that are down, I wrote a piece on this, it was so crazy, 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 really shocked people. They report the stocks 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 Valley Western Alliance, some banks that don't even have rent regulated exposure were getting hit five or 10%. And some of them have got it back, some of 'em not. I guess you could take two minds to that. You could say, Hey, the market shot first and ask 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 this how of stuff. How are you thinking about that?
Derek Pilecki:
Yeah, I think investors in the regional bank space have PSTD to some extent. We just went through March of 2023 and I think the NYCV 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 okay, credit quality, we're seeing the first signs in NYCB here, NYCB was supposed to have perfect credit. I mean they've had perfect credit for years, decades with New York apartment buildings. There've been no losses and this is a change. And then the other narrative of them crossing a hundred billion dollars 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. All of a sudden you have these banks that are approaching a hundred billion, okay, what do we have? What do these banks have to do to get to those levels? And so I think there's several things going on there, but a lot of banks that had just fine earnings that are pretty far away from a hundred billion dollars are down 15%. I think that's pretty interesting.
Andrew Walker:
A few things I want to follow up. So in March, 2023, let's just start there. That was deposit risk, especially at Silicon Valley Bank. You had people just, they were pulling their deposits left and and you saw how quickly, I do remember people were comparing WAMU in 2008 where five or 7% of the deposits left in 48 hours because people were still literally going and trying to deposit checks. Whereas Silicon Valley Bank, you just wired out. A lot of people were rethinking deposit risk and I'm of two minds of it. 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 and NYCB wasn't really having flight until the morning before the bail-in or bailout or whatever happened, and I kind of think 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?
Derek Pilecki:
Yeah, I think the big surprise from March of 2023 was the level of uninsured deposits in the banking industry. I saw one, I think it was either Steven, I think Steven's 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 to some extent. I understand 250,000 is not a high level for an insured deposit account. I have a retired school teacher who has say, been a diligent thrifty woman all her life and she's gotten a little over a million bucks, like 250 thousand's, not a lot of money for somebody who's been thrifty and in their seventies. And so we need to raise the level of deposit insurance 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 mean they had bill.com had a nine figure checking account that's the government shouldn't have to insure it or the industry shouldn't have to insure those accounts.
Andrew Walker:
It circle had 4 billion in uninsured deposits sitting had it. I saw that number and I was kind of like, dude, just let the fricking guys fail 4 billion in uninsured deposits. Are you kidding me?
Derek Pilecki:
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. There's no discipline imposed on the banks by depositors zero. Silicon Valley had a 16 billion market cap when they went to go raise that capital. There's no depositor who would look at that market cap and say, oh, my deposit's at risk. 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.
Andrew Walker:
There were people who were long First Republic or Silicon Valley bank stock who get paid professionally to look at this and you go to them and be like, Hey, what do you think about the health to maturity issues? They've got negative equity, Justin, and they wouldn't know what you were talking about. And that is just absolute shame on them. But if a professional investor doesn't know what they're talking about now, they're probably not a financial investor like you if that was the case, but if they couldn't be expected to pick that up in a 10 K, how can you expect mom and pop who are just going and getting a toaster oven when they open a deposit accounts? Get that? I'm completely with you there.
Derek Pilecki:
I completely agree. And so then question in 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 raise deposit insurance. It makes it look like you're bailing out rich people by raising deposit insurance where you're actually making the system safer. So hopefully that'll change in coming years and more sanity in Washington. But who knows
Andrew Walker:
I, oh, go ahead. Go ahead.
Derek Pilecki:
I guess the other thing is in Dodd-Frank, I think they implemented something where congress has to sign off any increases in deposit assurance rather than the FDIC just making a regulation change. So they're just going to make it harder to raise deposit insurance.
Andrew Walker:
The two most frequent 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've got a position one way or another, but just wanted to ask you, I know you cover all these things. What do you think about Valley these days?
Derek Pilecki:
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. 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, Manhattan exposure, 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.
Andrew Walker:
I like that. I like 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 First Citizens obviously beat them to that, but Valley 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, 2023, there was a lot of stories like, Hey, if you were approved to be a bidder, that was the all clear signal from the Fed. This is a safe bank, these are good and valid. Getting hit now may be right or wrong, but NYCB obviously it was not the all safe. Go ahead. Clear regulators are on your side. Obviously they had issues and regulators were the ones who kind of tapped them and revealed a lot of those issues. I
Derek Pilecki:
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 of 23, instead of taking a bargain purchase gain on the signature deal, have them put all that extra money into the loan loss reserve. Back then it wasn't. I mean they were crossing a hundred billion. It seems like that with a little bit of foresight on the regulators part, that would've been the time to get everything to the level that they wanted.
Andrew Walker:
So NYCB trips over a hundred billion, and what happens is the regulators kind of unexpectedly to N-Y-C-B-I think go to them and say, Hey, we're going to treat you like a hundred 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 kind of NYCB had written previously to Signature. I don't think they bought most of signature's rent regulated book, which obviously the DS 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 NYC B's a 60 to 70 billion 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. What's happening right now with them,
Derek Pilecki:
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. And so buying signature, they was made them a lot less liability sensitive. I mean, they've 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've been upside down if they hadn't done the signature deal, so they might've already had problems.
Andrew Walker:
Okay, that's perfect. Let me ask you another one. This is to 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 it. I remember the day signature failed or First Republic or one of them. This stock went from like 60 to eight in a day, and I remember looking at be like, oh, I want to buy this, but oh my God, bank runs. What does someone know? And they've been clear, their depositors were a little freaked out by it and all this sort of stuff. As you know, I sit today 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, great controls for dealing with trouble loans, recovering 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.
Derek Pilecki:
Yeah, so I think Western Alliance is in this category that I consider growth banks. They earn high returns on capital. If you look at the long-term, outperformers and 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 dilutive acquisitions. So Western Alliance for the most part, does all organic growth. Occasionally they'll make an m and 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 their tangible book value grows over time. 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 NBNA, 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 he's 69 years old, so usually bank CEOs don't manage far into their seventies, 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 brush because they had one business that was venture banking. They had bought a bank in the Bay Area Bridge that had a lot of Silicon Valley clients and they had some deposit outflows, not only from those clients but from tangential businesses because of the headline risk.
Andrew Walker:
This episode is sponsored by tegu, the Future of Investment Research. From the beginning, Tegu 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 tegu 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. Tegu 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 tegu.com/value.
That's tus us.com/value. I guess so I'm no financial experts but financial expert, but the thing I always struggle with is to me, I look at a bank and it's really hard for me to look at US regional banks and understand these guys were reporting until 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 some of the guys who get cash and flows from buying gift cards at the kiosk and they've got that and they've just got free money there, which has much different types of risks. There's a different set of risks there, but I wasn't sure how a regional bank could kind of earn a 20% return on equity consistently. So I'll just ask you what's the secret sauce these guys have and then I do have a follow up.
Derek Pilecki:
Yeah, I think some of it's the efficiency ratios. So banks tend to be very old organization and very bureaucratic systems are very ancient, 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're not a consumer facing bank. I mean they're commercial banks, 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 asking for higher yields on loans and being more aggressive in deposit pricing is where you get the higher returns.
Andrew Walker:
Okay. Yeah, I guess the other knock I had on Western lines, and this isn't a huge one, but after First Republic especially, it's always go check the fair value of the loans and the held to 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, 2% 30 years, and any bank that looked at and be like, no, we have to pair value those when interest rates to 7%, it's not huge for them, but I think they've got about 3 billion of fair value marks on their loans. I'm just looking at their 10 K 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, it's 6 billion, 6 billion actually. So it's kind of like, oh, well you mark to market and you're paying a little over two times tangible book value and even with a great franchise that will acrete back, but even with a great franchise that mark to market, what do you think about that?
Derek Pilecki:
Yeah, so it's not quite two times book value. It's 60 bucks, $46 a share, so it's like one,
Andrew Walker:
Oh, well, I was taking the 3 billion fair value mark on the loans out of that six, so then that's kind of how we're slipping to that.
Derek Pilecki:
Okay. Yeah, I mean they grew their single family book at the wrong time. Yeah, I mean 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 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 it can't have a perfect investment. Everything is, I agree it's a knock, but it's not a big deal
Andrew Walker:
And 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. When you were mentioning I didn't realize how tech enabled Western Alliance was, and when you were mentioning 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? They have redone their, it is the most modern architecture of any of the banks and you're paying 1.1 book, but as you compound that, it's just going to result in much better returns, lower expense. 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.
Derek Pilecki:
I agree. I think Capital One has been forward thinking on their tax spending and they've been trying to get to a more modern architecture, so I agree that they're probably better positioned than the other big banks 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? My issue has been Capital One's advertising program. When we see their ads all the time, we see the high profile celebrities in those ads. Taylor Swift, how expensive is it to have Taylor Swift in your Capital One ad, Samuel Jackson, Charles Barkley, Jennifer Garner, they're all over the place. Is the extra profit from the tech spend more efficiency going to drop to the bottom line and it's going to shareholders or is it going to get reinvested in advertising?
Andrew Walker:
Sue, 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 the old thing where the CEOs used to love to have 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 because then Jeff Bezos gets the hobnob with all the Hollywood 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 kind of the CEO's way and the execs ways of getting to hobnob with important people?
Derek Pilecki:
I don't know that, I mean, I respect Richard Fairbank a lot that he's very forward thinking. I just worry that he likes advertising, spending college football bowls or whatever and not sure. I'm not convinced that their return on marketing spend leads to higher returns. Yeah, 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.
Andrew Walker:
Another one just high level I've thought about is they've got the Capital One. It's not quick slow. They're going after the high end credit card customers and they've been talking about how they're putting a lot into it and they think the return on investment is measured in seven to eight years. And I've always kind of looked at it and been like, I mean Capital One, I don't know, 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 looked at and be like, is starting up a de novo high spend credit card where these people are very likely to switch for the best rewards and you're trying to grab 'em. It just didn't seem like a great return on investment and I believe they said it would take seven or eight years to capture what they're grabbing customers out us. That doesn't seem like a great return for a bank to me.
Derek Pilecki:
I mean, I think Capital One's been going after that high spend customer for a number of years. I think it's been a long time. They were subprime at first and then they went to the barbell strategy of subprime and high spenders. So I think it's a super competitive space. I mean it's JP Morgan and it's American Express and everybody's going after these high spenders, and so I think they've been doing it for a long time. I think it's hard. I think it's a super, I'm not aware or not up to date of what the returns marginal returns are in that space. With that, do you
Andrew Walker:
Have any thoughts on the discovery merger?
Derek Pilecki:
I think it's a super interesting strategic move, right? I'm sure Capital One's been wanting to buy Discover for a number of years, and I also hear that JP 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 Amex at the top, visa and MasterCard in the middle and discover at the bottom and Visa and MasterCard. Their take rate is, although it's been increasing in recent years, it is not huge. The issuing bank gets most of that discount. And so why Capital One not 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, how do they get the Discover discount rate higher? And I think that's a hard, that's going to be a thing for Capital One to work through.
Everybody wants to get to the Amex positioning where Amex says, we have the big spenders. If you accept Amex cards, 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 Amex 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 hodgepodge of Subprime Middle America and then the high spenders that 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. That'll be the interesting thing to follow with a story.
Andrew Walker:
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 IT 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. You guys need to give us a really good rate here or else you're going to miss out on a hundred 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 were talking about with Western Alliance Cap One, 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. I've done a few extra calls. I don't know of anyone who's out here being 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 of the Discover customer base, all of their marketing spend everything, all their underwriting onto the Capital One platforms, they guided too. 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.
Derek Pilecki:
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.
Andrew Walker:
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. I don't think there's an antitrust issue with Discover Capital One. 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. Basal three rules are coming in and banking's a regulated industry. If we took capital requirements up to 25% tomorrow, bank investors would not be very happy. That would be So how are you thinking about just the overall regulatory environment with banks and financials these days?
Derek Pilecki:
Yeah, I think the regulators have been under a lot of pressure recently. There's the article about the improprieties that came out in the Wall Street Journal about how there's sexual harassment or an unsafe workplace. I think there's and SVB ramifications, why weren't they more on top of that issue? And then they constantly are going to get pressure. Banks are too big, but every time we go through one of these episodes, the big banks just keep getting bigger. I mean, first Republic went to JP Morgan, right? And so it seems like we're going to continue this wave of a consolidation into the big banks and people hate the big banks, so that just leads to more regulation. I think it's tough here with we're heading into what seems like a little higher credit losses. 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 regulators been too lax and now they're going to certainly come down hard on the banks? Are they going to be start looking through loan files more diligently? Are they going to start questioning bank's, risk management systems? I think that's all higher regulation, higher regulatory costs for the banking system.
Andrew Walker:
Do you think about anything when it comes to, obviously we're in election year, I think people overblow elections a lot of times. How is the election year going to impact Lululemon's earnings? Not a lot, but with banks it does make a difference. 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?
Derek Pilecki:
I think the best benefit for the banks is with mergers will be easier in the Republican administration. So I actually think that Discover Capital One is going to have a trouble if Biden wins the election. I agree based on typical antitrust view, it should get passed, 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.
Andrew Walker:
It's so crazy that Discover Capital One is an antitrust cross airs because 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. 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. We come in and we form 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 here. I just really struggled to see what the issue is. Discover they've bungled that network for 15 years. It's not going away. At worst, it's four to four, but to me this is three to four, right? Because Capital One saying, Hey, we buy them, we're going to inject all this spend.
We're actually going to a competitor to the big 2.5 and it's not like any of the assets are disappearing. 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 a lot against a lot of the thinking to be like big Bank m and a, 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.
Derek Pilecki:
I guess the tough part is Capital One will be the biggest issue of credit cards. So does forming the giant credit card company like that raise concerns? But I agree with you that it should pass on. If you look at other industries, it's still going to be a super competitive market.
Andrew Walker:
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 Robinhood 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, ah, I missed it. But I want to talk about Robinhood 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 Robinhood. And it's really interesting right now, crypto markets, retail trading coming back in a big way, the stocks had a big run, but just want to ask how you're thinking about Robinhood these days, overall thesis, all of that.
Derek Pilecki:
So I bought Robinhood 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've lowered their guidance for an end interest revenue because the yield curve shifted. And so I looked at those are two environmental factors. So it wasn't like the company failed to produce anything, it was just if you're going to own a stock for five years, the environment's going to change, especially a brokerage stock. So Guy I generally don't buy or sell stocks because the environment at the margin things in the margin, the environment changed, 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 eight bucks.
I had been short the stock when they originally came out of the IPO, I just thought it was overvalued. They had their meme stock issue where they shut off trading GameStop because they were short on 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 and under control, reigning in stock-based compensation. And then they also had been introducing new products and they had this very clear product roadmap of introducing new things to customers to 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, 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. I mean Schwab really, maybe we will get into this in a second, but I think we really need another competitor to Schwab and I thought Robinhood could potentially be that other competitor. So buy-in net cash value. I felt like there was a little downside risk given that there had been profitable to the previous three quarters. And then you also have that upside optionality of if we go 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 I didn't expect it to double in two months. I mean that's just luck. I didn't expect the Bitcoin ETF to launch Robinhood to start going up.
So from here, the stocks at 16 and a half, it's down a little today. It's moved a long way in a shorter period of time. The other, but I think that they Q1 numbers are tracking pretty well, right? They've spoken to a couple of conferences. They've said customer deposits are running above recent quarters. Has the stock moved at this point? It's kind of like a game of expectations where the people who've bided up to 17 bucks, what are they expecting the company to say on customer growth and net new assets versus to what the number that actually prints. So I'm agnostic about the stock here. I still own it, haven't sold any shares, but it's gone up so much. Who knows? It's trying to call the next wiggle.
Andrew Walker:
No, this is why when I read it I was like, oh, this is such a good thesis. I'm kicking myself like, Hey, it's trading. I had close to net cash liquidation value. Now you would always have the question, I think about something like there was this company context logic, the ticker, there was WISH and they had 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 Robinhood, 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 GameStop, 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 everything kind of crashed on the heels of the manis 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 is correlated to crypto going up retail really being interested versus your more traditional, the people, the mid thirties who you would traditionally think are putting $10,000 into an E-Trade account or something,
Derek Pilecki:
Right? So I think they're starting to get more longer term customers. I still think it's a lot of brand new investors. They're very friendly to brand new investors. The average account size is $2,000 means a lot of small accounts. They have the best user interface, but they don't have a really good desktop app. The user interface is on the phone, and so they just introduced retirement accounts, so you couldn't get an IRA account until a couple months ago. All those new products are an effort to get bigger accounts. They have this gold subscription where for $5 a month you become a gold subscriber to Robinhood and you get 5% on your excess cash. So I mean compared to Schwab, that's huge. 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.
Andrew Walker:
Could you imagine if IBKR 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 hears that.
Derek Pilecki:
I hope not mean, I hope IBKR continues to work on the user interface. I mean to make it easy for new investors, I mean it's very good for professional investors like us. We can kind of struggle through that and love IBKR, I've been a customer for 15 years, but I love it. But for somebody who's brand new to investing, it's a little tougher, right?
Andrew Walker:
You open the IB KR account and you're like, did I just download a nuclear launch codes or something? It's so crazy. I'm completely with you. Whereas I can't remember if I did tried Hood, but I've tried some hood competitors when they were giving out a lot of freebies in 2021 and it's literally you just load it and they're like, press buy here and you have a stock. It's so intuitive and so simple. You mentioned Hood has a lot of $2,000 customer accounts. Is it even profitable to have a $2,000 customer account just between KYC regulatory servicing the client? Is that even profitable?
Derek Pilecki:
I think it probably is at the margin. I mean $2,000 customer account, they're probably not subscribing up for the Gold Service. They leave a couple hundred bucks. They don't pay 'em any interest on the couple hundred bucks cash that's in the account. So they make 10 bucks revenue a year off that maybe 20, I don't know. They're not mailing statements, right? I mean they're just sending emails. They probably do have to mail a quarterly statement. So what does that cost? A dollar a statement? So the marginal cost is four or $5 a year.
Andrew Walker:
A few years ago you were following the Fannie's and Freddy's pretty closely. Are you still involved there at all?
Derek Pilecki:
I'm still involved,
Andrew Walker:
Yeah. Hit me.
Derek Pilecki:
Yeah, I worked at Fannie before business school, right? I worked there for five years and I think eventually it's going to come out of conservatorship. I mean, I only own the preferreds that own the common. I think the common gets diluted pretty well, pretty hard. I think that 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 senior preferred state keeps accreting, and so I don't think that gets forgiven. I think that's gets converted to common and that, so the common doesn't really make sense to me, but I think the junior preferreds, they'll take a haircut, but the haircut's not going to be anywhere close to the junior preferreds are trading 12 cents on the dollar. I think it could be. Even if they take a 30 or 40% discount, it's still a lot upside from here.
Andrew Walker:
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 Preferreds, and I hear that. I get it. You think you put a conservative administration in, they want to get the government out of things, but Trump was in office four years ago, and I remember four years ago when he came into office, you were like, he's going to get the preferreds out of conservatorship. And I just wonder, is it in the government's incentive? Is the Trump admin really going to do it? Is Biden admin really going to do, 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 own the preferreds, but the government's making a lot of money here and they've been able to delay this a long time. Is it really in anyone's interest? Is this ever going to actually happen?
Derek Pilecki:
I think it'll happen at the end of an administration. So 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 Biden loses. They could do something because Biden could use it as a honeypot for housing finance, and so they could use the proceeds from an IPO to fund some pet housing programs that Democrats have. I don't know from what, when I talk to people in Washington, I don't know that the Biden administration's really getting ready for that scenario. So I don't think that it's likely to happen this year under Trump. I agree with you. The story was Trump Trump's going to get them out of conservatorship. I think Secretary Ian who decided not to do it because I think there was some people questioning or saying that, oh, he had good ties to some junior preferred holders, so he's definitely going to do it. And I don't think it
Andrew Walker:
Wasn't good ties. I remember when they got elected and he put 'em in, I was like, oh my God, these are going to convert this. Because
Derek Pilecki:
I don't think he wanted to ruin his reputation. 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 is my read of it.
Andrew Walker:
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 to 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 Mnuchin, he pumped money in $2 per share, lots of common, lots of warrants into NYCB. The stock is three 40, so his investment is a lot different than what shareholders are looking at these days, but 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?
Derek Pilecki:
I think it was a super good investment on his part. I mean, at that entry price, we 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, a billion dollars, 1,000,000,006 if they exercised the warrants?
Andrew Walker:
The warrants are cash, the warrants are cashless. So I don't think that would bring anything in. Okay.
Derek Pilecki:
Yeah. So I guess it's an open question. Do they know that the CRE issues are small enough that the billion's going to be fine, but it looks like a good entry price from here?
Andrew Walker:
When I was hearing them talk on the heels of it, I was with you. I was like, Hey, why not just buttoned up? If you're about to raise capital, 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, as the regulators tapped NYC 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 regulars might've 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, there is, to my understanding, a very good deposit base there. There's some good franchises if you can do that. And 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 promised to give you the runway to get to the other side, like buy at $2 with tangible book at six, take two years, put it all towards reserves, that $2 investment looks really, really attractive. Sure. Is kind of how I was thinking about it.
Derek Pilecki:
I mean, I think that's a fair way to think about it. I don't know that those discussions take place, but I wouldn't be surprised.
Andrew Walker:
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 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 the rents going up 4% instead of 3% next year or something.
Derek Pilecki:
I mean, I think it's super interesting about NY CCBs loan loss reserves because they're in the asset class that they had literally a hundred thousand dollars of losses over 30 years. And so since they come public in their early to mid nineties, and so they had always run with light loan loss reserves because they always said, look at our history, close to zero losses. And then right when they do the signature deal and get to Q4 and the regulators tap 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. 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 'em that we don't see yet? There's stories about them doing interest only loans. And I think it's a fascinating situation.
Andrew Walker:
As you're saying, it blew my mind when their Q4 results came out and they say, Hey, we've got this 22 billion loan portfolio or whatever it was, and over the past 10 years, write-offs in it, have rounded to literally zero. And then it just surprised me. Everyone's freaking out about this. I'm like, what are you guys freaking out about 22 billion of loans and you guys are freaking out. They've had no write-offs. 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 crazy how quickly things flipped. And that margin flipped with obviously it's all the 2019 law, but as one friend told me, it 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.
Derek Pilecki:
For sure. Sure.
Andrew Walker:
Hit me.
Derek Pilecki:
I wanted to talk to you about a subject, sorry to drive you off course, but talk. I've been having this discussion with a lot of bank managements in its own buybacks, and so my thinking on buybacks has evolved, and I wanted to go through the subject with you. You might have a different view, but
Andrew Walker:
I'm excited.
Derek Pilecki:
I've become less enthused with buybacks. And so as a bank investor going through a couple of 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 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. Some of 'em are like, well, our stocks below tangible book value, and a lot of people are telling us the buyback goods of the creative. I'm like when you're at 90% a tangible book, it's not that accretive. It's basically the same as buying it back at tangible book and you have to buy so much. If you're a Barclays or a Citi group and you're trading 45% a tangible, you should be buying 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. So if you're a shareholder of Coca-Cola, you want them to buy back stocks so that they don't buy Columbia pictures. 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. 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 iax and talking to bank management teams about not being so quick on buybacks and just wanting to get your view or pushback from you.
Andrew Walker:
No, look, I do love, one of the great things about banks is when they trade interchangeable book, 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 a hundred percent for buying back stock. And I guess how do you think about that level? 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 talks about and let's just to make numbers simple, say that we think they can do 20% returns on tangible capital. 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 on tangible capital 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? Where's the line for you where yes, now's where I think they should start leaning into the share repurchases.
Derek Pilecki:
I actually think Western Airlines is a great example of a bank management team that aligns with what I'm thinking. They were issuing capital, they had an ATM issuance back when three years ago when the stock was above a hundred and 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 at 80% of tangible book. I think they've shown flexibility of both issuing when it is a high price to tangible book buying back when it's below tangible book. Now, I wouldn't say with their high ROE 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 as soon as I got above tangible book, they're like, we're not buying back any more shares above tangible. We're not going to dilute tangible book by buying above tangible book.
I guess I think some investors think you need to buy back stock to get your equity account lower to show a higher ROE 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 ROE of the business holding aside whether capital level is correct or not. 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 accounts smaller to show you the best thing
Andrew Walker:
About banks is the first number they report kind of below the income statement is it's not ROE, it's return on average assets. So you can kind of just look at the return on average assets and anything in the high approaching one or above one is great, but cool. Your ROE is 20 because you're running 5% set one and you're about to get seized by the regulators. Okay, great. Your already looks great, but you're about to get cs. I'm with you. I think the market does a good job of looking through that individual metric.
Derek Pilecki:
Yeah, I agree.
Andrew Walker:
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That's TG us.com/value. No, it's an interesting thought, especially for someone whose largest position is for citizens. 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 distressed 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 look at something like 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. 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 buy back share. So it's just I'm with you. There can be better uses for share buybacks, but the two things that's striking me are that gray area and a lot of 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 where the one swing, NYCB maybe signature saved them, but it pushes them over a hundred billion? Or Jamie Diamond's always talked about how you regret some of the bailouts he did in 2008. 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.
Derek Pilecki:
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. Their biggest assets, they're W2, and so that prevents 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 finding those situations where the bank CEO thinks like an owner, and I find the guys who try to grow tangible book value growth also think like owners. They think of that's how I'm going to get value out of this bank. And there's a lot of smaller banks who, 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 and 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 at not all time highs as a sign of weakness. And so I think that's that's keeping bank m and a tempered down.
Andrew Walker:
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 'em and they've put in the golden parachutes for the management teams and the directors, 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 500,000 and the director's making 50,000, as you said, the kings of town. Finally, they have an incentive to sell. It's so funny how that incentive and look, there's no hostile bank m and a, right? You cannot do a hostile bank m and 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 basis and grow a tangible book value.
Derek Pilecki:
The other thing, Andrew, I wanted to mention, we've talked about banks a lot and I would just want to share, 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 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, high. I think it's increasing. I think they're getting chipped away by fintechs. I think the very big banks are great. They haven't captured the consumer business, so the small banks are left with just commercial business and a lot of commercial businesses just CRE. And so it's a very volatile asset class.
So I think I would not say, Hey, let's go invest in the KRE together for the next 20 years. I don't think that's a great winning strategy. 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 credit's not as bad as the market thinks, but I think, and I think there are some interesting banks that are good growth banks that will compound for years, but the average bank, I think it's a struggle. And I think that deposit flight last year kind of highlighted that. So I just wanted to mention that
Andrew Walker:
Obviously it's a deposit flight, but do you think it's also, it's well documented, right? JP Morgan, their tech systems, their consumer app, 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 30 years ago the difference between a community bank and the chase at the time was not that large because you didn't really need the internet presence, your regulated, so do you think it's just that return to scale and that issue that so many people talk about, Hey, the us we've got this dichotomy between we have 5,000 banks, but we're regulating and the systematically important banks have this huge advantage where your deposits are safe there. Is that all kind of the issue that makes these below average businesses these days?
Derek Pilecki:
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 they used to. People like 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, they see the ads, they feel comfortable that there are 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 or for the most part. And so I just think the consumer is not in play for small banks on average. Yeah, they have some 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.
Andrew Walker:
Well, Derek, I have so much more to ask you about. Genworth was actually what I reached out to you about that I wanted to originally talk to you about. There were lots more questions, regulation, but you've been super generous with your time and I have a physical therapy appointment I need to run to. So look, 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,
Derek Pilecki:
Andrew, thanks for inviting me. Great to talk to you.
Andrew Walker:
A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.
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