Description

I’ll keep this short since it’s time sensitive.

I believe FRC is a compelling short candidate and may already be insolvent at the current moment.

Keep in mind, SIVB was insolvent 24 hours before it was formally seized - same with SBNY it was very likely insolvent as of the close of business Friday before its seizure on Sunday. FRC was not seized Sunday so it means it was not insolvent as of close of business Friday. But it very well could be insolvent into this week once the pent-up outflows hit.

If you mark to market FRC’s total assets, not just securities but also loans, it currently has substantially negative book equity - don’t take my word for it - go check the 10-K for yourself.

While the market believes SIVB was the dirtiest shirt so to speak, FRC is worse on an asset basis.

FRC has many of the exact same type of clients as SIVB - 57% of their business banking loan portfolio is to PE/VC clients.

63% of FRC’s deposits are business deposits who are going to be most sensitive to the $250k issues given FRC stated its average business has <$500k of average balance - thereby implying only half-covered by FDIC insurance.

There were numerous Twitter reports of lines outside branches with people looking to get money out over the weekend - anecdata seems to imply a large amount of clients moving money to Chase / SIFI banks over the weekend - I find it unlikely the Fed announcement will change their minds.

FRC has posted a number of statements reiterating their liquidity but has never once mentioned solvency. Keep in mind, being able to borrow from FHLB or the new fed facility only gives you a lifeline, but you are then funding assets earning ~3.13% with loans at ~5% - doesn’t seem like a very good business to me, nor a sustainable one. I don’t see how this is worth anything more than a generous .25x imaginary book value at the very best.

In the worst case, enough clients leave that there is no real remaining deposit base which makes this a zombie bank with no real earnings model and a massive hole in book equity.

Solving the liquidity crunch is only one part of the equation - they need to aggressively raise capital to plug the hole, but everyone knows that so the odds of getting this done are slim to none in my view. The fact they only were able to come up with $10bn funding facility from JPM (likely at the behest of the Fed) means they probably struck out with almost every other option - firesale of the bank, emergency equity raise, etc.

The other key item is the fed actions do not guarantee deposits > $250k, they merely set a precedent of generally protecting them. No business will be comfortable with this risk until the FDIC limit is raised through Congressional action  - until then businesses, funds, etc. will view it as too risky to keep large balances with FRC which has historically been their business model.

Their funding costs (before all this) increased by 100+bps from 2021 YE to 2022 YE. IF this continues, their long-dated loans are going to be a negative carry trade in the not to distant future.

Legal Disclaimer: This research report expresses my research opinions, which I have based upon certain facts, all of which are based upon publicly available information. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect.

Catalyst

FDIC seizure

Continued deposit outflow