On May 1, the FDIC seized First Republic Bank (FRC), the 12th-largest bank in America, and sold it to JPMorgan (JPM) for $10.6 billion.
Shareholders, including depositors, are getting wiped out, but everyone else is safe.
JPMorgan will keep all the branches at this point and simply take them over.
FRC is the new “2nd-largest bank failure in U.S. history” since it is slightly larger than Silicon Valley Bank.
But don’t let the scary banking crisis headlines lead you astray. Every U.S. bank is not in danger of collapsing.
At Intelligent Income Daily, our goal is to provide you with a roadmap to steer you toward financial freedom regardless of market conditions. And in times like these, provide you with a clear picture of what is going on.
Today, I am going to walk you through why First Republic Bank failed, and provide you with an excellent opportunity to capitalize on the headline hysteria with a great bargain blue-chip deal.
Why First Republic Failed
First Republic failed because its business model was incompetently unique and its risk management was poor, just like Silicon Valley Bank (SVB), Signature Bank (SBNY), and Silvergate Capital Corp (SI).
Its business model was focused on very low-interest-rate jumbo mortgages.
It was able to provide these thanks to the use of floating-rate mortgages and interest-only mortgages.
In other words, by not locking in interest rates for 15 or 30 years and not paying off the principle for the first 5-10 years, First Republic could offer Mark Zuckerberg, CEO of Facebook, a $6 million mansion refinancing at 1% in 2012.
First Republic combined dirt-cheap mortgages with white-glove personal treatment to get lots of wealthy clientele in California and New York to put most or all of their cash into its bank.
The average checking deposit was $2 million compared to the average of $10,500 for most U.S. banks.
Its mortgage loans started to lose money when interest rates skyrocketed, and just like SVB, First Republic was sitting on a mountain of paper losses. In fact, it’s $27 billion in losses was double the value of the profits it generated.
And many of First Republic’s loans did not pay 5% interest, which meant the bank quickly began losing money and was soon out of options.
If it sold its assets (such as those mortgage loans), it would lock in $27 billion in losses. But if it didn’t sell them, it couldn’t repay the government a $100 billion loan that was due on May 15.
And that’s why JPMorgan was able to buy the 12th-biggest bank in America in a sweetheart deal that protects everyone but First Republic shareholders.
Opportunities Like This Put Your Portfolio on the Map
Instead of looking at the fundamentals and the incompetence of FRC, investors are running away from the regional banking industry entirely.
Many investors still have scars from the Great Financial Crisis and are afraid that any whiff of a banking crisis means a severe recession and a 50% market sell-off are coming.
But this has created incredible opportunity for those that are calm enough not to overreact.
Right now, Truist Financial Corp (TFC), the 7th-largest regional bank in the U.S. with an A rating, is 53% undervalued… Trading at 6.9 times earnings.
I find this absolutely comical.
Truist is so strong that it was one of the 11 banks that tried to rescue First Republic by depositing $30 billion into it.
In fact, it was one of the banks that the U.S. government called on it to rescue First Republic Bank.
It is not at risk of failing.
And, the only difference between Truist and JPMorgan, is that Truist doesn’t do investment banking.
Truist Financial was created by the merger of BB&T and SunTrust Financial in 2019.
Truist has a safe 7.9% yield and it’s growing at 6.4%. This means that over the long-term, you can earn about 13% annual returns. That’s about 30% better annual returns than the U.S. stock market delivers historically.
Here is the return potential for Truist if it grows as expected and returns to fair value by the end of:
- 2023: 97%, which is 174% annually
- 2024: 106%, which is 54% annually
- 2025: 132%, which is 37% annually
That’s a 132% return potential in the next three years for a safe, sleep well at night investment.
As I highlighted in our most recent issue of the Fortress Portfolio, the investment that put Warren Buffett on the map started out with an investor overreaction that caused the price of American Express (AXP) to be cut in half just like Truist Financial.
In relation to AXP, Buffett found it laughable that one of the strongest and most trusted names in finance could be so undervalued as a result of a scandal outside of the company.
So he invested 40% of his brand-new partnership’s capital to buy 5% of AXP for about $1 per share.
He sold it five years later at $5, a 400% or a 50% annual gain.
This is the investment that put Buffett on the map and let him buy Berkshire in 1965.
And this is what is happening today with Truist and other regional banks we are currently recommending in our Fortress Portfolio service.
Safe Investing,
Adam Galas
Analyst, Intelligent Income Daily
Source: Wide Moat Research