KJP

The cash flow statement starts with net income and then has various entries that reconcile income statement entries to actual cash flows. The income statement included an employee compensation expense related to the stock option compensation, probably calculated via Black-Scholes. That income statement expense did not involve actual cash being paid out. So, the amount of that expense is added back in the cash flow statement. In other words, what the operating section of the cash flow statement is showing isn't a cash inflow related to stock compensation. Rather, it's a reversal of a non-cash expense that appeared on the income statement.

These may interest you: Macfarlane Group Sabre Insurance You may also find some interesting UK small caps at these two blogs: https://perlican.substack.com/ https://lewissrobinson.com/ (@expecting value on Twitter)

https://www.businesswire.com/news/home/20230504005831/en/Western-Alliance-Bancorporation-Issues-Statement-Disputing-Recent-Financial-Times-Article?utm_campaign=shareaholic&utm_medium=twitter&utm_source=socialnetwork

I made a similar "adjusted book value" calculation as the author to account for the highly company-friendly terms of the preferred. But what p/b is this bank worth? The Bank's historic performance was not great, and it's currently getting the benefit of high short-term rates on all of its excess cash. As short-term rates come down, they're going to have to put that money to work elsewhere. Do they have the track record to suggest they can put that much additional capital to work wisely? The annual report suggests their home markets have insufficient demand: "Pursuing Growth: We have expanded our market area to include a commercial lending presence in North Atlanta, GA and Nashville, TN with a strategy to expand to other markets within Tennessee, Texas and North Carolina by 2025." I question whether it's a wise idea to rapidly expand commercial lending into new geographies in which the Bank has no relationship or experience. What kind of borrowers is it going to attract in these new locations? So, the bank is very cheap on an asset basis, but I'm less sanguine on its ability to have a much larger quality loan book in place by, say, 2025 or 2026. In his latest letter, @Tim Eriksen noted that CZBS appears to have bought back almost 5% of shares outstanding in April: https://static1.squarespace.com/static/5ea6570a0ba57d406203e048/t/644872509e61401b01f36b78/1682469456611/Q1+2023+Results+for+Cedar+Creek+Partners.pdf In my view, that's a smart use of capital in light of the current stock price and the potential difficulties in finding good loans for all of the capital they have.

Yes, I'm invested in some of them. For example, take a look at CZBS's latest call report. It's trading at ~5-6x earnings on what appears to be a conservative balance sheet (at least for a bank).

You appear to like small, high-insider owner, asset-rich/cash-rich, companies that may not be great businesses. If that's right, these may interest you: Saga Communications Unit Corp. FRP Holdings IES Holdings Monarch Cement Legacy Housing Corp. LICT Corp. Tower Properties EACO Corp. A similar but larger company: IAC Corp.

Unit Corporation

I do not think this is the case with respect to banks borrowing from the Fed. See Section 7.8 to Operating Circular No. 10, which I believe applies to discount window borrowing and may apply to BTFP: https://www.frbservices.org/binaries/content/assets/crsocms/resources/rules-regulations/071613-operating-circular-10.pdf

Wynne Godley and his disciples have developed a similar analysis.

Of the liquid assets I manage myself (so no house, no owned business, no 529, no externally managed) 40% - Cash & treasuries [This is an artifact of certain recent inflows and sales, rather than a market timing call] 6-8% IAC FRP Holdings 4-6% Black Stone Minerals IES Holdings Cable bundle (Charter, LIberty Broadband, Comcast) 2-3% Macfarlane Group Nickel 28 Capital SNC-Lavalin Leatt Corp. BTI Turning Point Brands Clipper Realty IDT Sub 2% (includes a mix of legacy positions and semi-special situations) Enterprise Products Partners Saga Communications [semi-special situation that no longer is] Citizens Bancshares M&F Bancorp Cato Corp [approaching negative enterprise value] Nuveen Intermediate Duration Municipal Fund [liquidation] SIO Gene Therapies [liquidation]

Leatt Corp.

Interesting market reaction to First Citizens winning what presumably was a competitive auction. Apparently there is no winner's curse when it comes to the FDIC.

This is much different than how I understood your original hypothetical. At the end of the day, if Treasury has to spend $2 trillion backstopping failed banks, then I see the potential inflationary consequences. But there are many steps, assumptions, and hypotheticals between (i) a change in the relative preference between deposits and Treasuries, and (ii) mass bank failures that require huge US government/Treasury backstop spending. That is what I was trying to get at.

By the way, I do agree with this fundamental point. Regulators and politicians will choose inflation over many things, including the risk of depression.

How the does transaction print more money? Won't my own bank's reserve balance go down by the equivalent amount since I've withdrawn cash to buy the Treasury?

What would be the mechanics of this? If I withdraw money from my savings account to buy a Treasury, what does the seller do with the proceeds? Likewise, would banks be insolvent if mass Treasury buying (increased demand relative to bank deposits) drove down yields (and drove up the prices) of the securities on banks' balance sheets? I realize Treasury markets are very deep, but can they absorb $5 trillion of additional demand with moving yields down and prices up? And can they given the apparently two-tiered Treasury market (only Treasuries owned as of 3/12/23 can be pledged at 100% of face under the Fed's new lending facility).

Relatedly: https://www.reuters.com/article/global-banks-fdic-mbca-idUSL1N35Q0ME Two in the thick of it admit big outflows early in the week but claim deposits stabilized by the end of the week: https://www.pacwestbancorp.com/news-market-data/news/news-details/2023/Pacific-Western-Bank-Issues-End-of-Week-Update/default.aspx https://investors.westernalliancebancorporation.com/news-releases/news/news-details/2023/Western-Alliance-Bank-Provides-End-of-Week-Update/default.aspx The fact that these two feel the need to give frequent updates on their solvency isn't a good sign.

I suspect you are right that Signature's business lines played a big part in its downfall, but were there also other potential issues? If the deposit withdrawals were big enough, wouldn't Signature have had to start turning to its loan book to raise cash either directly or as collateral, rather than rely on just the securities portfolio? Based on Item 2(b) of page 24 of that call report, there were more MTM losses lurking in that loan book. Moreover, by accepting those loans at par as collateral, Fed/Treasury may have set a precedent that they did not want to set and weren't going to set on behalf of a bank like Signature. It may seem implausible that a $25 billion securities portfolio would be insufficient, but I also suspect the scale and speed of a modern "digital" bank run could be unprecedented, potentially resulting in failures of banks that would have survived in the past. I also suspect you are right that there are hundreds (thousands?) of banks that are insolvent if you MTM the whole asset base as I have suggested, but absent a run on them they will earn/amortize their way out of it.

On the other hand, credit has been quite benign. You may now get a period where credit worsens and NIM gets squeezed by low-yielding legacy assets. Or not. I'm a banking amateur (and even that may be giving myself too much credit).

Yes, that certainly seems to be the case. What is your view on something like Western Alliance? Too much of a gamble?

Are regional banks investments you like to hold long term, or do you try to swing in and out to take advantage of the volatility? I ask because I've generally avoided banks due to the (perceived by me at least) inherent leverage and black box nature of their balance sheets and the 10-year returns on many of the regional banks (MTB, USB, TFC) look quite poor.

Bought just under $12 and sold around $25. It was tricky getting in and out with all the halts. Western Alliance doesn't look like it was doing anything crazy, so it doesn't look like the kind of bank regulators would want to let go. That was my entire thesis for buying this morning after 30 minutes or so of research. In other words, I really know almost nothing about the bank. Moreover, I believe the vast majority of its assets (actual loans, rather than Treasuries or insured MBS) are not eligible collateral for the new Fed lending facility.

Sold this afternoon. Probably more juice left but so be it.

Western Alliance, which is probably the kiss of death for the bank.

What would the second chart below look like if you also marked to market the loan books of each of those banks?