First Citizens - New Stock Idea

[watsa_is_a_randian_hero]

You guys should check out FCBN.OTCBB.  I've already bought all I want, thats why I'm posting it here now  :)

 

Used to be listed stock, delisted in 2006 in order to avoid SOX costs.  Has audited public financials dating back to 1989; have not had a single loss.  Lowest REO ever was in 2008, at 8.9%.  Prior to that, average was around 12.5%.  Such a well-capitalized bank that the FDIC has been giving them banks to take over.  Because of this deposits are up about 40% through the recession.

 

Current Price $400 - $500 (illiquid because otcbb)

Current BV is $709

Current Tangible BV is $473

LTM EPS is $117.27  (PE of about 4)

LTM EPS, excluding 1 time gain is $25.65  (adjusted PE of about 18)

 

Based on historical ROE, ROA, earnings/deposits, and return on tangible equity levels in the past, my estimate of earnings in a normal banking environment are $80/share.  (forward p/e of about 6)

 

I know there are a lot of bank choices out there; I like this one because of its conservative nature.  Reminds me of a Berkshire or Fairfax.  The financials speak for themselves; 2005-2009 is on the company's website, 1989 - 2005 is on edgar.

 

http://www.firstcitizensonline.com/about/financial/index.html

 

 

 

[Guest kawikaho]

It is WAY too illiquid for my tastes. 

[watsa_is_a_randian_hero]

It is WAY too illiquid for my tastes. 

 

Yeah, this is definitely not something to get into without a multi-year outlook.

[JEast]

Nice idea, but why not other small banks as there are a plethora of small banks selling at 20-50% of (not book value) but tangible book value. Most are fairly liquid and many are even paying a dividend! Just my 0.02 :)

 

 

Cheers

JEast

[watsa_is_a_randian_hero]

Nice I idea, but why not other small banks as there are a plethora of small banks selling at 20-50% of (not book value) but tangible book value. Most are fairly liquid and many are even paying a dividend! Just my 0.02 :)

 

 

Cheers

JEast

 

Because I think the risk is less.  Its north-carolina cousin, First Citizens BancShares (trades on Nasdaq, FCNCA) is controlled by the same family (Robert Holding was Grandfather, took over in 1934).  FCNCA trades at 1.1x book because of its conservatism.  If FCBN traded for 1.1x book, it would be at $770.  

 

I guess my retort would be there have been plenty of insurers that trade for lower multiples than FFH, but why do people prefer those FFH? 

[JEast]

Less risk --  that is nearly always implied on this forum.

 

So I would agree, less risk is preferred. Therefore, if one looks at the tangible balance sheet without CDOs, MBSs, and etc several small mid-western and west coast banks appear to have little risk. In addition, some are paying dividends will you wait. Of course, DD is required but if you believe in management and that the assets (i.e. loans) are worth at least something greater than 25¢ on the dollar, you should do fine.

 

Again, nice idea, but just curious from a Graham perspective.

 

 

Cheers

JEast

[SharperDingaan]

 

Lot of red flags just went up.

 

Virtually nobody delists because they do not want to pay SoX costs; most folks do it because they dont want the greater scrutiny, or the transparency that SoX brings. While there are legitimate reasons why someone might want to go this route, its a very one-sided bias. Madoff, etc.

 

Acquisitions can hide run-rate, & they've made a lot of them when most comparative banks were severely stressed. How do you know that the pretty numbers are not simply because they are over-capitalizing ? especially when they seem to have a preferance for weaker controls (no SoX), & why is this one bank so much better than its peers ? Madoffs results were also better than his peers.

 

Legitimacy is assumed, because the fed is allowing them to buy banks? But the fed will allow any US citizen to buy a US bank if there's a reasonable chance that it will 'save' the target bank. Madoff again.

 

Where's the money coming from, & would you not expect this to be a entirely private company, financed solely by sophisticated investors ? - yet one can buy it discreetly, & for a fairly low price/share ?

 

Again there may be very valid reasons, but they had better be exceptional.

Some tight DD could save your neck.

 

SD

 

 

[twacowfca]

Well said SharperD.  Anyone know why they delisted?

[watsa_is_a_randian_hero]

Well said SharperD.  Anyone know why they delisted?

 

Read the filings from 2005/2006.  I work for an investment bank and have personally worked on delistings before.  The statement above about them is a generalized statement and not always the case.  Oftentimes, when there is a concentrated ownership it does not make sense to pay for the additional costs.  This is from their letter to shareholders in 2005 regarding why they delisted:

"Additionally, the SOX legislation was designed for ALL public companies, yet the banking industry is already heavily regulated. Even after de-registration, our banks will continue to be examined by the Federal Deposit Insurance Corporation, the South Carolina Commissioner of Banking, and the Federal Reserve Bank of Richmond. Bancorporation will continue to have its annual consolidated financial statements audited by an outside public accounting firm."

http://www.sec.gov/Archives/edgar/data/708848/000119312505184802/dex991.htm

 

 

 

SharperDingaan  - I could say the same comments about FFH.  FFH has been acquiring companies.  How do we know they are not trying to bury poor underwriting?  I think your comments about Madoff are laughable.  Madoff kept a ponzi scheme hidden for a long time, but this bank, along with its cousin FCNCA, have both been controlled by the same family from North Carolina for over 70 years.  Nothing is impossible, but I have little concern that this is a fraud.  Frauds fall apart over time.  Google the names Lewis R. Holding and Frank B. Holding.  Oh, and 1 other difference, Madoff was audited by his brother-in-law, not a actual auditing firm.

[SharperDingaan]

 

Thats why you do DD, & check against a broad spectrum.

There's also an underlying reason to that valuation - perhaps the fact that it does throw off flags ?

 

Best of luck to you

SD

[watsa_is_a_randian_hero]

I've been looking at this since their last transaction, in september.  While I dont buy into the idea that there's an underlying fundamental reason for the valuation (this implies efficient markets), I think the reason for the underlying valuation is lack of liquidity, its being compared to other small banks with much worse performance, and/or its been "forgotten about." 

 

For someone that has a multi-year horizon, you can look at it like a private equity investment and wait for a liquidity event years from now with multiple expansion.  They won't stay delisted forever.  I think there are 4 likely outcomes:

 

1.  Stays delisted until gains critical size (once listing costs in % terms aren't as much) and relists

2.  Frank B. Holding's family purchases shares unowned

3.  Outside bank purchases

4.  Merges with its NC cousin First Citizens BancShares (NASDAQ:FCNCA), also controled by same family

 

[Baoxiaodao]

Friday, May 22, 2009

Holding family tightens grip on First Citizens Bank with stock buy

Triangle Business Journal - by Lee Weisbecker

Lewis Holding, left, and Frank Holding Jr.

View Larger

 

RALEIGH – The board of Raleigh-based First Citizens Bank has hired an investment banking firm to buy up 125,000 shares of the bank’s stock on the open market – a move that is expected to further concentrate the grip of the Holding family on the $16 billion regional lender.

 

In a U.S. Securities & Exchange Commission filing the week of May 12, the directors authorized New York-based Keefe, Bruyette & Woods Inc. to buy the shares on the open market between now and the end of the year, adding that any shares repurchased in the deal “will be canceled.”

 

With 69 percent of the bank’s outstanding voting shares already in the hands of CEO Frank Holding Jr., former chairman Lewis Holding, Executive Vice President Hope Holding Connell, Executive Vice Chairman Frank B. Holding and other relatives, the move will leave individual members of the bank’s first family with a hefty, majority slice of an even smaller pie.

 

At a time when national, regional and community banks are selling shares either on the market or to the government, First Citizens continues to go its own way.

 

Does the buyback signal the first step in a First Citizens’ effort to go private, or “go dark” in current terminology? Doing so would relieve the bank of having to issue quarterly and annual financial filings for public inspection.

 

Still, University of North Carolina at Charlotte finance professor Tony Plath doubts that’s the motivation.

 

“At $16 billion, I think they are too big to go dark,” says Plath. “My guess is that what they are doing represents an investment in a stock they believe to be undervalued … I think it’s a good deal, a smart move and it does allow them to concentrate their holdings.”

 

First Citizens stock now trades in the $132 range, off by 16.5 percent during the past 52 weeks. That contrasts with regional competitors, including Alabama-based Regions Bank and Ohio-based Fifth Third Bank, whose 52-week share prices have eroded by 73 percent and 61 percent, respectively.

 

First Citizens spokeswoman Barbara Thompson says the bank has no comment.

 

In addition to the stakes held by Holding family members, some 26 percent of the bank’s 10.4 million voting shares are held by a trust controlled by the family, according to a First Citizens proxy statement filed in March. That chunk, added to the individuals’ stakes, represents a 95 percent hold on the institution’s voting shares.

 

Keefe, Bruyette & Woods was brought in to conduct the buyback under an SEC rule, 10b5-1, which gives the board an automatic defense against any charges of insider trading.

[Baoxiaodao]

Friday, October 2, 2009

First Citizens behind S.C. buy

Triangle Business Journal - by Lee Weisbecker

 

RALEIGH – For the third time since July, a bank with ownership held by the Raleigh-based Holding family has snapped up a troubled institution in a government-brokered deal.

 

This time the action came south of the border at Columbia, S.C.-based First Citizens Bank and Trust Company Inc., which agreed on Sept. 25 to acquire the faltering Georgian Bank of Atlanta, with $2 billion in assets.

 

The deal gives First Citizens 180 offices in South Carolina and in east Georgia, along with an opening in the cherished Atlanta market.

 

The South Carolina First Citizens is part of a $7 billion, three-bank holding company, First Citizens Bancorp. Inc., which took itself private in 2006. According to the bank’s last publicly filed proxy in December 2005, Lewis and Frank Holding of Raleigh’s First Citizens Bancshares, owned 561,124 shares, or 68 percent, of the South Carolina company.

 

Lewis Holding’s daughter, Carmen Holding Ames, in 2005 was on the board of the South Carolina bank, which despite going private continues to be listed on the Over the Counter Bulletin Board Exchange, currently trading at $400 a share.

 

Despite the ownership links, the North and South Carolina banking operations have always been run as separate entities, says Angela English, a spokeswoman for the South Carolina bank.

 

The fact that the North Carolina First Citizens subsidiary IronStone Bank also operates in Atlanta led to some market speculation that the overlap there and in other areas could spark consolidation of the now-separate entities.

 

English confirms the Holdings still own a stake in the South Carolina bank but discounts talk of any cuts. “It’s pure speculation,” he says. “It’s not a subject being discussed.”

 

What links the two, however, is their use of so-called government loss-share agreements to propel acquisitions.

 

North Carolina’s First Citizens, in July and September, acquired troubled banks in California and Washington under Federal Deposit Insurance Corp.-brokered deals that provided government guarantees against future losses.

 

Loss share was a tool the government used in the 1980s to help clean up after the savings and loan meltdown.

 

Generally under the arrangement, the acquiring bank agrees not only to pick up a failing bank’s deposits but also its commercial and even mortgage loans. FDIC estimates the potential losses the acquiring bank might face in taking on the varied assets and then agrees to cover 80 percent of the hit. If any losses exceed the estimate, the government picks up 95 percent.

 

When First Citizens (N.C.) agreed to buy Venture Bank in Washington, for example, it took on $874 million in Venture assets; FDIC’s loss share covered $715 million, about 82 percent.

 

First Citizens (S.C.) got even more generous terms. It’ll pick up $2 billion from Georgian Bank and the government’s loss share will cover $2 billion – 100 percent.

 

FDIC, in a release, didn’t comment on the change in terms, remarking only that the loss-sharing arrangement was expected “to maximize returns on the assets” and keep the assets in the private sector.

 

Agency spokeswoman LaJuan Williams-Dickerson wasn’t available for comment.

 

Part of North Carolina banking history, according to Bill Wagner of investment bank Howe Barnes in Raleigh, is how the Holding family has timed and made acquisitions, even in difficult times, to achieve the maximum benefit. The recent trio of FDIC-brokered deals, he adds, shows they are at it again.

[Baoxiaodao]

FCBN history:

 

 

In 1913, The Homestead Bank was founded in Columbia, South Carolina, and later became Commercial Bank and Trust Company of South Carolina. In 1964, the Holding brothers—Frank, Lewis and Robert, who were part owners of First Citizens Bank and Trust of North Carolina--acquired a controlling interest in Anderson Bank of Dillon, South Carolina, which had one location and sixteen employees. Over the years, Anderson Bank grew, changing its name to Citizens Bank of South Carolina in 1968. Commercial Bank and Trust merged with Citizens Bank, becoming First Citizens Bank and Trust Company of South Carolina, headquartered in Columbia.

 

In 1995, First Citizens acquired Summerville National Bank. In 2002, First Citizens entered Georgia by buying Citizens Bank, and added other Georgia operations with First Bank and Trust and The Bank of Toccoa in 2003. In 2005, First Citizens bought Greenville-based Summit Financial Corporation and People's Community Bank in Aiken[2].

 

 

 

 

CEO is well aware of his heritage

 

The chairman and CEO of First Citizens BancShares - the third generation of the Holding family to lead the Raleigh-based bank - says he's not forgetting the past as he leads the company into the future.

 

"We have a long history of successfully serving lots and lots of customers," Frank Holding Jr. said. "I might be a third-generation banker. We have third-generation customers. There is a lot of satisfaction that comes with that. There is a lot of responsibility. There is a real sense with me that I desire to be a strong steward."

 

Holding was named CEO last year - succeeding his uncle, the late Lewis R. Holding - and added the title of chairman in February. Under his leadership this year, the bank made two major acquisitions: Venture Bank, which has 18 branches in the Puget Sound region of Washington state; and Temecula Valley Bank, an 11-branch bank in Southern California.

 

Those deals were First Citizens' first acquisitions in six years, but Holding made it clear that the bank's strategy hasn't changed.

 

"It's really the change in opportunity," he said, referring to the sales of failed banks being brokered by the Federal Deposit Insurance Corp.

 

The banks First Citizens acquired had been taken over by the FDIC. Analysts say the agency is offering deals that are too good for banks that are on solid financial footing to pass up. Unlike many large regional banks, First Citizens remained profitable throughout the recession, thanks in large part to its conservative lending policies, and didn't need to take federal stimulus money.

 

Today First Citizens BancShares' two brands, First Citizens and IronStone, have 432 branches in 17 states.

 

"Certainly our industry is going through one of its most difficult times," Holding said. "In terms of First Citizens, I think, generally, we are navigating the challenges of today better than much of our industry. A lot of it has to do with the careful and consistent business practices that we've employed over a period of years, or decades even. It's not something you can prepare for ahead of time."

 

So is First Citizens eager for more deals? "We're continuing to look at opportunities and to talk about opportunities with the FDIC," Holding said. "They've indicated that they've got more problems that need resolving."

 

Customer service

 

In an interview in a ninth floor conference room at the bank's headquarters on Six Forks Road, Holding, 48, repeatedly stressed the importance of customer service. But, unlike many CEOs of publicly traded companies who talk incessantly about improving shareholder value, Holding never mentioned shareholders once.

 

Holding also said he has no plans for regular conference calls with analysts and investors to discuss quarterly results, a common practice for publicly held companies the size of First Citizens.

 

That's in keeping with First Citizens' status as an atypical publicly held company: The Holding family owns a controlling interest in the business.

 

The Holding family also has been extremely private over the years, shunning press interviews. Frank Holding said he couldn't recall ever discussing First Citizens with the media.

 

"Let's call this the exception, not the rule," he said.

 

Holding nonetheless spent nearly an hour answering a wide range of questions about the company. More than once he responded to a question by asking a variation of: "Do you want me to do a deep dive on that?"

 

Below are highlights of Holding's comments:

 

On First Citizens' willingness to expand into nonadjacent markets, contrary to the industry practice of avoiding gaps on the map: "I think we realized at some point in time that geography wasn't the glue, that geography wasn't what we really needed to focus on. It was really the customer that we needed to focus on. ... So we are much more interested in customer demographics and those types of things."

 

He added that technology, such as the ability to service all the bank's branches from its data center on Tryon Road in Raleigh, have enabled the company to leap-frog markets in a way that it couldn't have 40 years ago.

 

First Citizens' branches, which have been said to reek of money and resemble Ethan Allen showrooms: "We feel like our branches help us develop a brand."

 

First Citizens can't match larger competitors with advertising dollars, Holding said, "but if we build a building, side by side, I do have the ability to build a nicer building. And that will create a statement that will last for years to come. And we have the ability to expense that over a number of years."

 

The bank's commercial real estate portfolio: Its real estate loans are heavily weighted toward owner-occupied properties, with a "very modest amount" of loans involving buildings owned by investors who lease them to others. "We consider the risk profile significantly less," he said. The reason: Loans are underwritten based on the fundamentals of the business itself.

 

The recent accusation by the former president of Law Enforcement Associates that state Sen. Tony Rand profited on First Citizens stock using inside information Holding supplied: "There is no basis to it."

 

The Holding family's controlling ownership stake in other banks, including the 180-branch First Citizens Bancorporation of South Carolina: "It's evolved over a long period of time. They are separate institutions with separate shareholders and separate management. It's just different stories behind each one of them, I'm sure."

 

But Holding did identify one common thread behind the various banks: Their information technology and data processing needs are mostly handled by First Citizens' data center in Raleigh.

 

On growing up in a banking family: "My parents never put any pressure on me to work in the bank. ... Whatever I pursued, they wanted me to pursue it wholeheartedly and be the very best that I could at it."

[Baoxiaodao]

Georgian Bank's wealthy clients speeded failure

 

By Paul Donsky

 

The Atlanta Journal-Constitution

6:41 p.m. Thursday, October 1, 2009

 

Georgian Bank’s deep pool of wealthy customers helped it grow at lightning speed in recent years.

 

But the Atlanta bank's well-heeled clientele also turned out to be an Achilles' heel, hastening Georgian’s demise when enough depositors pulled out their money as the enormity of the bank's problems became clear last summer.

 

While not a classic bank run, experts said, the exodus of cash was large and swift. The trend prompted regulators who were already closely watching the bank to shut it down last Friday.

 

It’s not clear how much money left the bank. Walt Moeling, Georgian’s attorney, said the figure was in the millions, though he could not be more specific. The bank’s president, John Poelker, was traveling and could not be reached for comment.

 

Georgian was one of the state's largest community banks when it failed, with more than $1.9 billion in deposits. What really set it apart from the state's two dozen other failed lenders, however, was the affluence of its customers. As of last June 30, about 86 percent of its deposits were held in accounts larger than $100,000. The average size of those accounts: $673,000.

 

In good times, Georgian’s robust funding base enabled the bank to lend aggressively to builders and developers working in metro Atlanta’s then-booming real estate market. But having so much money tied up in relatively few depositors also meant that a large amount of cash could leave in a hurry should things go awry.

 

The crisis at Georgian erupted in early July, when the board replaced founder and CEO Gordon Teel. A few weeks later, the bank’s horrid second-quarter performance became public. Losses totaled $36.7 million, while nonperforming loans soared from $24.7 million to $306 million.

 

All of this apparently spooked Georgian’s wealthy customer base, many of whom had deposits far exceeding the federally insured limit of $250,000 -- giving them good reason to pay close attention to the bank's fortunes. Rival banks near Georgian's Buckhead branch, including Fidelity and Atlantic Capital, began seeing Georgian customers walking through the doors to open accounts.

 

Jim Miller, CEO of Fidelity Bank, said “many millions” came in over the past month, including wealthy individuals and investment managers looking for a safe place to stash clients’ cash.

 

The steady stream of new business became a torrent last Friday, when word began swirling that Georgian was set to fail. Last Friday and Saturday, Miller said Fidelity signed up about 75 former Georgian customers.

 

“It was just a land rush,” he said. “These are sophisticated people. They want a community bank to bank with.”

 

While the Federal Deposit Insurance Corp. guarantees up to $250,000 per account, no depositor has lost any money during the recent spate of bank failures in Georgia and nationwide, including uninsured funds.

 

But people still get scared when they hear their bank is having problems, said Doug Williams, president of Atlantic Capital Bank. He said the flow of customers to his bank picked up after Georgian’s leadership change and disastrous second-quarter numbers were released.

 

“That’s when people really to get concerned and we started to see a lot more movement” of customers from Georgian, Williams said.

 

The loss of wealthy local customers was far from Georgian’s only problem. It also relied heavily on wholesale and brokered deposits from national investors – so-called hot money that is liable to vanish quickly when problems arise. More than one-third of the bank’s funding came from these sources.

 

Chris Marinac, a bank analyst at Atlanta-based FIG Partners, said despite Georgian’s mounting pool of bad loans, the bank probably could have survived for another six months if not for the loss of deposits. His firm is watching a number of other banks with similar loan problems that are still alive because “no one’s walking out,” he said.

 

Georigan’s fall was dizzying. The bank reported a profit through the end of last year and few problem loans until the second quarter. Georgian’s deposit base even held steady through the second quarter, according to the FDIC records.

 

The bank was formed in 2001, then purchased in 2003 by a group of investors led by Teel. The investors raised $50 million to recapitalize the bank and turn it into an aggressive lender.

 

After its shutdown by the FDIC, Georgian's remaining accounts and assets were acquired by First Citizens Bank and Trust, of Columbia,  S.C.

 

 

 

 

 

 

 

 

 

WASHINGTON — Regulators closed the $2 billion-asset Georgian Bank in Atlanta on Friday, the industry's 95th failure of the year.

 

Despite its relatively small size, regulators estimated it would take a heavy toll on the Deposit Insurance Fund, costing $892 million.

 

The failure came less than a month after the Federal Deposit Insurance Corp. issued a sweeping cease-and-desist order against the bank. The Aug. 31 action cited the bank for poor board management, policies that were "detrimental to the bank," and operating with a large quantity of bad loans without an adequate supply of capital reserves.

 

The enforcement action, among other things, ordered the board to get more involved with the bank's affairs and retain qualified management. It heavily restricted whom the bank could extend credit to and required a reduction of concentrations in risky loan types. The bank, chartered in 2001, had been profitable for most of 2008, and earned $4 million last year. But it took a nosedive in the second quarter of this year, losing $37 million. At the end of the quarter, it had $306 million of assets in nonaccrual status.

 

The FDIC announced Friday that the bank's assets and $2 billion in deposits would be sold to First Citizens Bank and Trust Co., based in Columbia S.C. The failed bank's five branches will reopen Monday under the First Citizens name. The South Carolina bank entered into a loss sharing agreement with the FDIC to take over virtually all of the failed bank's assets.

 

 

Georgian Bank's collapse was the 19th failure in the state this year, and marks another time a significantly sized institution has been taken over by the government.  On six of the last seven Fridays, regulators have closed at least one institution with over $1 billion in assets.

The pace of failures has slowed somewhat. Eleven institutions were closed in September, compared with 15 in the previous month.

[Baoxiaodao]

watsa_is_a_randian_hero, thank you for this very high quality idea. Please forgive me for posting so much but I guess some background info would be helpful to everyone.

 

Keep posting your ideas. I would be your most loyal audience!

 

Cheers,

 

Bao

[watsa_is_a_randian_hero]

If you have access to a database such as CapitalIQ you can get about 20 years of history on FCBN - very stable, conservative management.  If you don't have access I'd be happy to email to you.

 

Here's another idea - I'm only sharing this now because I'm already up to my eyeballs in this trade.  

BRK-BNI

I entered this first back in November.  The trade involves selling the $100 apr put on BNI and buying the $95 put.  For doing so, you currently receive about $1.1, and must post $3.90 in margin per share ($5 - $1.1 = $3.9).  This results in a 28% return as long as the deal with BRK goes through.

 

If you want to hedge, you can hedge buy shorting BNI shares, and will earn a risk-free return in the neighborhood of 10-15%.  I hold the position unhedged, and was able to sell the spread at an average of $1.60 (a 47% return on $3.40).  This is probably the single-best trade I've seen since Fairfax in Aug 2007 in terms of risk-reward.

 

 

 

[Matson125]

Just out of curiosity, will the BNI options still trade after the merger or will they be cancelled?

 

Cheers

 

Michael

[Guest kawikaho]

They should still trade under a new symbol.  This is what's going with the Ticketmaster / Live Nation merger:

 

https://cboe.com/publish/TTStockSM/10-008.pdf

 

Watsa's trade sounds interesting.  I highly doubt the Berkshire deal will fall apart.  Buffett has way too much clout going into this one.  But, why would anyone buy the $100 april put?  I don't understand that trade.  Although there is some probability that the deal doesn't go through, I would expect the BNI to go down, not up.  I don't understand why someone would need to hedge BNI at $100. 

[gokou3]

 

BRK-BNI

I entered this first back in November.  The trade involves selling the $100 apr put on BNI and buying the $95 put.  For doing so, you currently receive about $1.1, and must post $3.90 in margin per share ($5 - $1.1 = $3.9).  This results in a 28% return as long as the deal with BRK goes through.

 

Interesting idea.  One can also short the $100 call and buy the $105 call, with the only risk being someone putting in a higher offer than $100.  Such risk is even smaller than the merger falling apart IMO.  As of Jan. 27 closing, bid price for Apr10 $100C is $1.15 and ask price for Apr10 $105C is $0.65, meaning a $0.50 premium earned per spread contract for maximum payout of $5 (if BNI ends up above $105).  10% return vs VAR.

[RichardGibbons]

I'm not so sure that this transaction is risk-free, because I think that the options don't wind down on the day of the transaction, and the transaction is not all cash.  Basically, I think with the position as described, the day that the transaction goes through, the position becomes a bull credit spread on Berkshire equal in size to 40% of the original position.

 

http://search.cboe.com/cgi-bin/MsmGo.exe?grab_id=0&page_id=43451&query=bni&hiword=bni%20

 

So, suppose that the transaction closes on Feb 15, and at that point Berkshire is trading for $70.  Then each put would then become a contract for a combination of 60% cash and 40% Berkshire.  Suppose that on Feb 20, Buffett dies, and Berkshire falls to $35 when the options actually expire in April.  You'd lose half of your 40% of Berkshire, which would be the equivalent of a pre-merger price of $80 for BNI.  So, you'd take the maximum loss of $3.90. 

 

Or is there something here that I'm missing?

 

One interesting thing is that, if my reasoning is correct, this is effectively a way to trade options on Berkshire, though there are some complexities (like if you sell calls, will the buyer exercise them the day the transaction closes in order to get BNI's special dividend?)  Looking at the LEAPs, I initially thought they were cheap, which made me want to buy them.  But them I realized that the "true" price would actually be 250% (100%/40%) of the quoted price, which then made me want to sell them through a covered call.  To me, it looks like the BNI July covered calls yield about 10% in a half year.  So, 10% for taking the downside risk of holding Berkshire for half a year.  I'm going to have to think about it a bit more....

 

Richard

[watsa_is_a_randian_hero]

I'm not so sure that this transaction is risk-free, because I think that the options don't wind down on the day of the transaction, and the transaction is not all cash.  Basically, I think with the position as described, the day that the transaction goes through, the position becomes a bull credit spread on Berkshire equal in size to 40% of the original position.

 

http://search.cboe.com/cgi-bin/MsmGo.exe?grab_id=0&page_id=43451&query=bni&hiword=bni%20

 

So, suppose that the transaction closes on Feb 15, and at that point Berkshire is trading for $70.  Then each put would then become a contract for a combination of 60% cash and 40% Berkshire.  Suppose that on Feb 20, Buffett dies, and Berkshire falls to $35 when the options actually expire in April.  You'd lose half of your 40% of Berkshire, which would be the equivalent of a pre-merger price of $80 for BNI.  So, you'd take the maximum loss of $3.90. 

 

Or is there something here that I'm missing?

 

One interesting thing is that, if my reasoning is correct, this is effectively a way to trade options on Berkshire, though there are some complexities (like if you sell calls, will the buyer exercise them the day the transaction closes in order to get BNI's special dividend?)  Looking at the LEAPs, I initially thought they were cheap, which made me want to buy them.  But them I realized that the "true" price would actually be 250% (100%/40%) of the quoted price, which then made me want to sell them through a covered call.  To me, it looks like the BNI July covered calls yield about 10% in a half year.  So, 10% for taking the downside risk of holding Berkshire for half a year.  I'm going to have to think about it a bit more....

 

Richard

 

 

I was saying if you hedged it out.

 

 

[finetrader]

It can be a good trade, but i don't think it is risk free.

Even if you short BNI, if the deal goes as exected, your short BNI convert to short BRK (adjusted for ratio of 40% BRK stock and 60%cash) .  If BRK do go up a lot before you close your positions (at expiration of your options) then you could lose money on that trade.

 

in other words: your potential loss on your short could be more than the spread premium received on your options position.

 

 

[WhoIsWarren]

Well Randian, I hope you still own FCBN.  It and sister company FCNCA have agreed to merge.  FCBN up 45% today, and a nice c.3 bagger since you first touted it.

 

I own the bigger, more liquid FCNCA - have done since early/mid 2009 (a c.2-bagger), so I can't complain too much.

 

As you've pointed out already, I'm attracted to the bank's conservatism, "constancy of purpose", to quote Deming, and a decent track record that suggests they know what they are doing.

 

I've not had much of a chance to review the terms of the merger yet, so can't offer an opinion.  However, given that it's mostly a stock deal, I guess you'll shortly be joining me on the share register :)

[watsa_is_a_randian_hero]

Well Randian, I hope you still own FCBN.  It and sister company FCNCA have agreed to merge.  FCBN up 45% today, and a nice c.3 bagger since you first touted it.

 

I own the bigger, more liquid FCNCA - have done since early/mid 2009 (a c.2-bagger), so I can't complain too much.

 

As you've pointed out already, I'm attracted to the bank's conservatism, "constancy of purpose", to quote Deming, and a decent track record that suggests they know what they are doing.

 

I've not had much of a chance to review the terms of the merger yet, so can't offer an opinion.  However, given that it's mostly a stock deal, I guess you'll shortly be joining me on the share register :)

 

yes, i still own.  was my largest holding at one point, prior to this deal was 2nd largest position.  last week was a good week...i was fishing in canada all week with no internet and just saw this. pm me if you want to discuss more.