I last updated my regional bank basket strategy on 3/12/15: UPDATE for Regional Bank Basket as of 3/12/15
This basket will be updated randomly, usually within 1 to 2 months after the last update.
I am posting this update at SA, rather than in my blog, for the first time, simply to show what I am doing to SA readers who may have an interest in this sector and my investment strategy for it.
With sector basket strategies, my primary focus is on the total return of the basket, particularly compared to a low cost sector ETF.
For the regional bank basket, I compare my returns to the SPDR S&P Regional Banking ETF (NYSEARCA:KRE).
In 2014, KRE had a total return of 1.84%. I compare my performance numbers with KRE in a Regional Bank Basket Update as of 1/2/15.
This strategy is explained in my Gateway Post on this topic:
REGIONAL BANK BASKET STRATEGY GATEWAY POST
Snapshots of realized gains and losses can be found at the end of that post.
Net Realized Gains To Date: $17,957.38
Basket As of 4/20/15 (excludes 1 purchase near the close today)
SPDR S&P Regional Banking ETF: $41.28 +$.28 or .68%
The start date for the basket was approximately in mid-2009.
The dividend yields contained in the preceding table are calculated by Yahoo Finance based on today's closing prices (4/20/15).
My dividend yield for each position will be different based on my total cost numbers. In most cases, with FNFG and VLY being notable exceptions (my two less than optimal picks), my dividend yield will be higher.
Dividend Yields 5% or higher: Based on Total Cost
WASH: 8.87%
NYCB: 8.44%
UBSI: 7.66%
FNLC: 5.38%
CBU: 5.15%
CIZN: 5.01%
CCNE: 5.%
I took a snapshot of the top three dividend yield positions as of today's close, with the first number in the description being the current unrealized gain percentage and the second being the current yield at my total cost numbers:
WASH +147.33% 8.87% Quarterly at $.34
NYCB +42.71% 8.43% Quarterly at $.25
UBSI +124.16% 7.66% Yield Quarterly at $.32
The CBU positions was bought at $23.18
I have several just below 5%, based on my total cost numbers, including BHB, BDGE, and WTBA
BHB +66.44% 4.51% Yield Quarterly at $.245
WTBA +65.99%/ 4.77% Yield Quarterly at $.14
BDGE +37.87% 4.83% Yield Quarterly at $.23
I have low costs in some other positions, where I later averaged up. A 50 share lot of FNB, which is currently owned, was bought at $7.8. The initial FISI lot was bought $15.55. The dividend yields at those prices would be over 5%. The FISI averaging up at $19.8 and at $18.8 negatively impacted the yield on the lower cost first lot purchase.
I am not tracking reinvested dividends in the preceding table. The unrealized gains per holding do not include reinvested dividends or commission costs.
Over the life of this basket strategy, I anticipate that the dividends will provide 40% to 50% of the total return. I am generally keeping my total out-of-pocket exposure between $40,000 to $50,000.
I will migrate up and down between 20 to 40 positions.
After a number of adds, I am now over my minimum $40,000 allocation after a bout of profit taking in 2013.
SPDR S& P Regional Banking ETF (KRE) Total Returns (NAV):
2009: -21.92%
2010: +20.65%
2011: - 5.98%
2012: +16.91%
2013: +47.34%
2014: +1.85%
I pared my regional bank basket significantly into the 2013 price spike and started a rotation into REIT stocks late that year. Update For REIT Basket Strategy As Of 3/19/15 - South Gent | Seeking Alpha
I have traded KRE, but no longer own a position due to that ETF's significant overlap with my regional bank basket.
At the moment, I own 50 shares of a much broader and lower cost Vanguard Financials ETF (NYSEARCA:VFH) , which I bought commission free in a Vanguard brokerage account.
And, I recently repurchased a low cost financial ETF commission free in my Fidelity Roth IRA: Stocks, Bonds & Politics: Bought 50 PJS at $25.2-Roth IRA/Bought ETF FNCL-Commission Free in Fidelity Roth IRA
Basket Dividend Totals:
In 2013, my dividend total from this basket totaled $1,932,93, up from $1,896.25 in 2012 and $1,660.57 in 2011. My dividend total for 2014 was $1,831.19, down slightly from 2013. The decline was not due to dividend cuts but to the lower exposure during the 2014 first half after a bout of profit taking during 2013.
Since I have increased my exposure in 2015, and plan on continuing to do so, I would anticipate that the total dividend amount will be higher this year than in all previous years.
Trades Since My Last Update:
I have not sold a position since the March 2015 update.
I have added to CCNE and CIZN: Regional Bank Basket Strategy: Added 100 CCNE At $17 - South Gent | Seeking Alpha; Item # 2 Stocks, Bonds & Politics: Averaged Down: Added 50 CIZN at $17.62
I did not want to own more than 50 CIZN, based on my risk/reward analysis, but the stock hit an air pocket shortly after the last ex-dividend date.
I will use a pop, probably somewhere in the $19 to $20 range, to unload the highest cost 50 shares bought at $18.76, profitably, and then keep the shares bought at $17.62.
That is what I call small ball. I lower my average cost per share which raises my dividend yield, while possibly harvesting one or more dividends and exit the higher cost lot or lots without creating too much of a tax hit.
Given the anemic volume in this micro cap, with just 815 shares traded today, I will need to use a limit order at the bid price.
A limit order at the ask price, usually significantly higher than the best bid, could easily result in a partial fill. I one share fill on a 50 share limit order for a thinly traded stock will happen and has happened to me.
At Fidelity, I can use an AON limit order for 100 shares.
Another possibility would be to unload 100 CIZN shares in the $20-$22 range with an AON limit order at my price.
CIZN closed today at $18.9, up $.6 or 3.28%.
I also initiated a position in LBAI: Item # 1 Stocks, Bonds & Politics: Bought 100 LBAI at $10.91
Quotes:
Lakeland Bancorp (NASDAQ:LBAI)
CNB Financial Corp. (Pennsylvania)
The preceding table does not include the 50 share repurchase of a previously sold regional bank stock which will be discussed in my next blog posted at my website.
Loan Losses and Charge Offs:
Another important component underlying bank earnings involves loan losses and charge-offs for bad loans. The trends here are favorable. It does not help a bank to see the net interest margin increase from 3% to 3.5% and then to have the non-performing loans to total loans increase from 1% to 3%:
I prefer to buy regional banks with a NPL ratio less than 1%.
Total Net Loan Charge-offs to Total Loans for Bank
Most of my banks are reporting charge-off ratios of less than the national average shown above.
Ideally, I want to see the net interest margin going up while the NLP and charge-off ratios are declining. So far, the regional bank investor is seeing two out of three major metrics move in a favorable direction. The key now is for net interest margin to expand.
Net Interest Margin:
Net interest margin compression continues to be the main problem:
Most of my regional banks have higher NIMs.
Net Interest Margin for all U.S. Banks-St. Louis Fed
Return on Equity:
Return on Equity remains subpar by historical standards but has recovered:
Return on Average Equity for all U.S. Banks-St. Louis Fed
I will focus on regional banks that are consistently reporting ROE numbers above 10%.
Return on Assets:
Return on average assets (ROA) is closer than ROE to historical highs:
I prefer to buy banks with ROA numbers over 1%.
Return on Average Assets for all U.S. Banks-St. Louis Fed
Capital Ratios:
I focus on regional banks that significantly exceed the capital ratios for well capitalized banks under the FDIC's definitions. FDIC Regulations
Dividend Yield: I will invest mostly in regional banks with greater than 3% dividend yields at the time of my purchase. I will make limited exceptions for the reasons noted in the Gateway Post for this basket strategy.
I may "cure" a failure to meet that threshold by coupling the purchase of an equity preferred stock with a common stock from the same issuer.
An example of that strategy to increase income was the May 2014 paring of the Boston Private Financial Holdings 6.95% Non-Cumulative Preferred Series D with the purchase of 50 shares of Boston Private Financial Holdings Inc (NASDAQ:BPFH):
Scroll to: 1. Bought 50 BPFHP at $23.35-Roth IRA and Bought 50 BPFH at $12.35 in the Regional Bank Basket Strategy
Bought Roth IRA: 50 BPFHP at $23.35 and 50 BPFH at $12.35 in Taxable Account
The preferred dividend yield is 7.44% at $23.35. The common yield was at the time of purchase about 2.59% at $12.35, but the bank raised the quarterly rate from $.08 to $.09 thereafter. Boston Private Financial Holdings Dividend Date & History
Since more money was invested in the preferred than in the common, the melded yield would be about 5.78%, with the common having the potential for dividend increases and more capital appreciation at the current prices for those two stocks.
Quotes:
************************
Some recent discussions on Financials and Interest Rates can be found in these SA Instablogs:
Increased Exposure To Financial Sector: Bought The Vanguard Financials ETF (VFH) - South Gent | Seeking Alpha
Added To METLIFE (NYSE:MET) - South Gent | Seeking Alpha
*******************************
Comparison Data From the St. Louis Fed:
Net Interest Margin for all U.S. Banks
Net Interest Margin for U.S. Banks with average assets under $1B
Net Interest Margin for U.S. Banks with average assets between $1B and $15B
Return on Average Equity for all U.S. Banks (abbreviated to "ROE")
Return on Average Assets for all U.S. Banks (abbreviated to "ROA")
Nonperforming Loans (past due 90+ days plus nonaccrual) to Total Loans for all U.S. Banks (abbreviated to "NPL ratio")
Charge-Off Rate On All Loans, All Commercial Banks
Assets at Banks whose ALLL exceeds their Nonperforming Loans (I prefer a coverage ratio of over 100% at the time of my initial purchase)(ALLL=Allowance for loan losses)
Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
