Introspection Is Key: Assessing Past Regional Bank Trades And Their Post-Sale Performance

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Includes: BOCH, BUSE, NASB, PBCT, RVSB
by: Philip MacKellar
Summary

Assessing the post-sale performance of past trades may fine-tune one’s investment process and improve future results.

In the aftermath of the 2008 Financial Crisis I purchased a handful of US regional banks.

I no longer own any regional banks and periodically look back to assess the post-sale performance of my former holdings.

Introduction:

Assessing the post-sale performance of past trades is one way to fine-tune one’s investment process and potentially improve future results. After 2008, the market was littered with dozens and dozens of beaten up regional banks. As we all know, some banks went bust, but many survived and were acquired or did well on their own. This month marks the 10-year anniversary of the current bull market, and given the significance of the anniversary I decided to look back at how the regional banks I used to own have done since I sold them.

Before I begin, I should mention that while I will be reflecting on my own trading activity, both Benj Gallander and Ben Stadelmann (the President and Vice-President of Contra the Heard Investment Newsletter) were also buying up financials. Some of their former holdings are mentioned below. Others are not as I did not own them, and still other regional banks remain as holdings in the President’s Portfolio here at Contra the Heard.

Regional Banks: Past Trades and Post-Sale Performance:

The trades in my largest personal account by alphabetical order were as follows:

Bank of Commerce Holdings (NASDAQ:BOCH):

  • Bought January 2011 at $4.40, then again at $5.75 and $5.71 in Q1 2015
  • Dividends during holding period were $0.03 per quarter
  • Sold in May 2017 at $11.50
  • Since selling BOCH, it has traded as high as $13.05 and as low as $9.90. The dividend was increased to $0.04 per quarter in July 2018.
  • When I owned this company, I often felt the dividend could be higher. Taking a glance at the payout ratio today I would still feel that way if I continued to own the stock.

First Busey Corporation (NASDAQ:BUSE):

  • Bought October 2012 at $14.34 and again in June 2013 at $13.20 (reverse split adjusted)
  • Dividends during holding period steadily increased from $0.15 to $0.18 per quarter
  • Sold in August and September 2017 at $30.05 and $31.00
  • Since then, it has traded as high as $33.18 and as low as $23.40, and the dividend has increased to $0.21 per quarter.
  • One item of note was a three-for-one share consolidation in September 2015. Of all the banks mentioned here, BUSE had the most aggressive roll-up strategy. Management regularly acquired smaller banks to increase the organization’s geographic scope and service offering. Looking back at the chart I can see that it got hammered during the fourth quarter sell-off; good on those who stuck with it through that downdraft.

NASB Financial, Inc. (OTC:NASB):

  • Bought in December 2010 at $14.76
  • Dividends during my holding period only started in the months prior to my selling, at $0.10 per quarter.
  • Sold in the latter half of 2014 at prices between $22.65 and $24.05
  • Since then it has traded as high as $44.40 and as low as $22.20, and the dividend has increased to $0.50 a quarter.
  • I sold this one in the second half of 2014 because it moved from the NASDAQ to the Over-the-counter market. As a Canadian investor, this move into the Over-the-counter exchange created tax and trading complications so I decided to sell. That was a mistake, as the stock has done beautifully since then. I would have been better off sucking up the trading issues and shouldering the tax complications. NASB had many of the characteristics I look for in an investment, including a large insider stake. Taking a quick look at INK Research, I see insiders remain significant owners.

Source: INK Research

Riverview Bancorp, Inc. (NASDAQ:RVSB):

  • Bought in February 2012 at $2.21
  • A dividend of $0.01125 per quarter was started in 2015 and had increased to $0.0225 by the time I sold.
  • Sold in September and October 2017 at $8.60, and again in March 2018 at $9.10
  • Since then it has traded as high as $9.85 and as low as $7.16, and the dividend has increased to $0.04 a quarter.
  • When I owned this company, I thought it may be acquired; I was not alone. Ancora Advisors filed a 13D in October 2014 and September 2015. Eventually they got a seat on the board. In May 2017, Ancora reduced its stake and stated they no longer thought a sale was necessary based on management’s actions. In addition to the possibility of being sold, as with Bank of Commerce Holdings, I often felt the dividend payout could be higher. Though management and the board have increased the distribution, I’d continue to feel the organization could afford a higher payout if I was an owner in RVSB today.

Suffolk Bancorp (Former – NASDAQ:SUBK/SCNB)

  • Bought: January and September 2012 at $12.14 and $14.40
  • Dividends started at $0.06 per quarter in mid-2014 and increased to $0.10
  • Sold: June 2016 at $30.06
  • The timing of my sale was unfortunate, because in the same month I sold it was acquired by People’s United Financial, Inc. (NASDAQ:PBCT) at a fixed exchange ratio of 2.225 PBCT shares for each SCNB share. The transaction was completed in April 2017. Suffolk shares rallied roughly $10.00 after the deal was announced in June 2016. Though the trade did well, I sure left good money on the table.
  • On a side note, the company changed the symbol from SUBK to SCNB in December 2015 when the organization moved from the NASDAQ to the NYSE.

Introspection, Reflections, and Conclusion:

Upon reflection, my biggest mistake overall was selling too soon. Though I was selling based on my valuation work, I would have done materially better had I waited a little longer and let my winners run. One could point out that I am saying this with the benefit of hindsight. Of course, I could have overcome this hindsight issue by selling in bunches instead of entire positions at once. I realized this before selling my last regional financial, but unfortunately for my portfolio’s bottom line I did not start selling in batches sooner.

Other reflections include general comments regarding the environment after the Financial Crisis.

  • First, there were so many regional banks to choose from – one could have owned dozens. There were so many beaten up, unloved, or downright hated names out there. Though I wish I had bought more (many others I was strongly considering have done equally well), portfolio balance and sectoral diversification are always key considerations.
  • Second, there was no need to rush into the space. While equities bottomed in March 2009, many of these banks continued to trade at low valuations and prices for years, which gave potential investors plenty of opportunities to get involved. Moreover, after I bought NASB and RVSB, they lost over a third of their value before recovering and powering higher.
  • Third, M&A has been a defining characteristic for the sector since the Financial Crisis. Many of the names above swept up little banks or were gobbled up themselves. With bigger financial mergers, such as the BB&T / SunTrust combination in the news, I would not be surprised to see this trend continue so long as the capital markets are buoyant and the regulators maintain their current approach to consolidation.
  • Finally, as mentioned at the top, while I do not own any regional banks personally, the President’s Portfolio at Contra the Heard continues to own two, suggesting there are still some regional banking bargains out there… at least from a contrarian’s perspective.

Where will the market, and the regional banks I used to own, go from here? If the market rallies these sales will look premature and foolish, but if the market declines and one can repurchase banking stocks at lower valuations, then my selling will look excellent. As it stands today, I’d say the trades did well, but a little more patience and breaking up the sales (and perhaps the buys) would have improved results.

Disclaimer:

The opinions expressed – imperfect and often subject to change – are not intended nor should be taken as advice or guidance. Contra the Heard Investment Newsletter is not an investment advisor or financial advisor. The information enclosed in this article is deemed to be accurate and reliable, but is not guaranteed by the author.

All amounts are in USD unless otherwise stated.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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