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Update For Regional Bank Basket Strategy As Of 12/28/15

|Includes: FFBC, Southern National Bancorp of Virginia, Inc. (SONA)

This basket strategy was last updated here: Update For Regional Bank Basket Strategy As Of 12/4/15 - South Gent | Seeking Alpha

Basket as of 12/28/15:

In this table, I am not tracking shares purchased with dividends.

A basket strategy is in essence a mini-sector fund. The components are weighted based on a variety of factors unique to that basket, including valuations, dividend yields, dividend growth potential, and diversification objectives.

I am in a holding pattern for regional bank stocks, waiting for more clarity on when net interest margins will improve.

Net Interest Margin for all U.S. Banks-St. Louis Fed

This basket has a minimum out-of-pocket exposure of $40K and a maximum of $80K. I am currently below my minimum level by around $6K. I am waiting for better opportunities.

I include two ETFs in the regional basket's table, which I do not own, for comparison purposes.

First Trust NASDAQ ABA Community Bank Index ETF (NASDAQ:QABA)

SPDR S&P Regional Banking ETF (KRE)

My net realized gain in this basket strategy currently stands at $24,998.64 REGIONAL BANK BASKET STRATEGY GATEWAY POST I started to build this basket in the 2009 Spring.

Snapshots of round trip trades can be found at the end of that post. This basket has generated an annual average $1,917 in dividends over the past 3 years.

Over the life of this basket strategy, I anticipate that dividends will generate about 40% of my total return.

The dividend yield of this basket is significantly in excess of the yields provided by the two regional bank ETFs noted above.

1. Eliminated SONA at $12.8 and $12.98-Two Taxable Accounts 100 Shares in Each

Trade Snapshot:

Profit Snapshot: +$86.26

Trade Snapshot:

Profit Snapshot:

History: Both 100 share lots earned $36 in dividend payments.

The regular quarterly dividend is $.08 per share and the $20 distribution was classified as a special dividend.

Rationale: I did not see much near term upside given the valuation. The one analyst providing earnings estimates predicts an E.P.S. of $.72 this year and $.75 next year: SONA Analyst Estimates

If those estimates prove 100% accurate, then the earnings growth rate is 4.1% Y-O-Y and the forward P/E at a $12.98 price is about 17.31. That P/E for the projected growth rate is outside of my fair value range, and that is after some slack based on SONA's intermediate term potential.

I bought more shares of the higher yielding FFBC with part of the proceeds. The yield differential was slightly over 1% per annum at the current penny rates.

2. Added 50 FFBC at $18.04

First Financial Bancorp (NASDAQ:FFBC) is a bank holding company that owns through its wholly owned subsidiary First Financial Bank 106 banking centers in Ohio, Kentucky and Indiana. "As of September 30, 2015, the Company had $7.9 billion in assets, $5.2 billion in loans, $6.1 billion in deposits and $813.0 million in shareholders' equity."

Map of Locations: Branch Locations & ATMs l First Financial Bank

Trade Snapshot:

Existing Position Before Buy:

This last 50 share buy raised my average cost to $16 per share:

Earnings Estimates: The current consensus E.P.S. estimates, generated by 9 analysts, is $1.24 this year and $1.41 next year. FFBC Analyst Estimates

The 2016 estimate gives me a 12.71 P/E based on the $18.04 price. The projected E.P.S. growth rate Y-O-Y is 13.7%.

Dividend: And FFBC has a higher dividend yield than SONA by about 1% per annum at current penny rates.

As shown in the preceding snapshot, I quit reinvesting the dividend in 2013. I did recently change the dividend option from payment in cash to reinvestment.

Prior Trades: It was just as well that I sold my highest cost shares at a minimal profit, since the share price has not gone up much since those pares.

Item # 4 Sold 57 FFBC at $17.03-Highest Cost Shares (12/23/13 Post)(profit snapshot=$37.68)

Item # 3 Sold 50 FFBC at $17.511 (September 2012 Post)

I discussed purchases of the other currently owned shares here:

Item # 1 Added 50 FFBC at $14.8 (December 2011 Post)(to keep those shares, I could not use FIFO); Item # 2 Item # 2 Added 30 FFBC at $14.24 (December 2012 Post); Item # 2 Added 50 FFBC at $14.65 (June 2013 Post)

Needless to say, FFBC has been a less than optimal pick, though my total return to date has been acceptable given the dividend. During that earlier period, FFBC had been paying out 100% of its net income as dividends.

The last quarterly dividend that included 100% of net income was $.27 per share and was paid on 10/1/13. Cash Dividends | First Financial Bank Of that amount, the regular dividend was $.12 and the variable dividend was $.15 representing the remaining net income per share. When stopping the payout of the variable dividend, FFBC did increase its regular dividend from $.12 to $.15 and the regular quarterly distribution was subsequently increased to $.16 per share.

At the current quarterly rate, the dividend yield is about 3.55% at a total cost of $18.05 per share and 4% at a total cost of $16 per share which is my current total cost per share number.

Chart: The stock recently hit a high near $21 and has retreated more than 10% since that 52 week high. The stock was trading below its 50 and 200 day SMA lines when I made this last purchase.

FFBC Interactive Stock Chart

Buying stocks after the piercing of those lines is a common occurrence here at HQ when it can be justified by valuation and yield.

Recent Earnings Report: For the third quarter, "net income was $20.9 million, or $0.34 per diluted common share, return on average assets was 1.09% and return on average tangible common equity was 13.77%" excluding pre-tax non-operating expenses primarily related to the Oak Street Financial acquisition discussed below.

Net Interest Margin: 3.67% (much higher than the average for banks with over $15B in assets: Net Interest Margin for U.S. Banks with average assets greater than $15B-St. Louis Fed)

ROE: 9.12% (prefer over 10%)

Return on Average Equity for all U.S. Banks-St. Louis Fed=9.22%

Return on Tangible Equity: 12.33%

Return on Assets: .97% (prefer over 1%)

Return on Average Assets for all U.S. Banks-St. Louis Fed=1.03%

The capital ratios are okay:

"During the quarter, the Company repurchased 148,935 shares at a weighted average price of $18.68 and has repurchased 1,399,835 of the 5,000,000 shares authorized in 2012."

The credit quality ratios are fine:

Nonperforming Loans (past due 90+ days plus nonaccrual) to Total Loans for all U.S. Banks-St. Louis Fed=1.6%

Charge-offs were .17% of average loans on an annualized basis, which is good:

Charge-Off Rate On All Loans, All Commercial Banks-St. Louis Fed=.39%

All of the national averages referenced above are from the 2015 third quarter.

Q3 2015 Results - Earnings Call Transcript | Seeking Alpha

Other Recent News: In August, First Financial completed its acquisition of Oak Street Financial, a nationwide lender that provides "loans, secured by commissions and cash collateral accounts, exclusively to insurance agents and brokers to maximize their book-of-business value and grow their agency business." The purhcase price was $110M in cash. First Financial Bancorp Reports Third Quarter 2015 Financial Results -Oct. 22, 2015

FFBC estimated that the Oak Street acquisition would have the following fianancial impacts:

This acquisiton announcement was made on 7/23/15. The market initially reacted positively to it.

The stock rose from an $18.07 prior to the announcment to $19.69 by 8/10. FFBC Historical Prices Then the stock market swooned, and the stock closed at $17.6 (8/25). The stock thereafter recovered with several closing prices over $20 in mid-November before drifting back down some.

Appendix: In this section, I have included some snapshots that contain material information relating to credit conditions and credit growth. Generally, credit standards start to tighten before the onset of a recession. There has been a slight tighening in commerical loans:

Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Large and Middle-Market Firms

Total Consumer Credit Owned and Securitized, Outstanding- St. Louis Fed

While more banks have started to tighten, and the trend is defenitely up, I do not yet view the slight uptick above zero as material.

Net Percentage of Domestic Banks Tightening Standards on Consumer Loans, Credit Cards-St. Louis Fed

Bank loans are still increasing:

Commercial And Industrial Loans, All Commercial Banks-St. Louis Fed

Fed created money used in its QE programs has largely remained in excess reserves and has consequently been unused in the real economy:

Excess Reserves of Depository Institutions-St. Louis Fed

There has been some recent drawdowns of excess bank reserves.

The velocity of money shows no signs yet of increasing as the amount of money has increased substantially:

Velocity of M2 Money Stock-St. Louis Fed

M2 Money Stock-St. Louis Fed

Quantitative Easing | CCIM Institute

Chart o' the Day: The (non) Velocity of Money: Reformed Broker

What Does Money Velocity Tell Us about Low Inflation in the US

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. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics:ERROR CREEP and the INVESTING PROCESS. 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

Disclosure: I am/we are long FFBC.