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Update For Regional Bank Basket Strategy As Of 2/20/16

|Includes: BBT, TOWN, Univest Corporation of Pennsylvania (UVSP)

This topic was last updated here: Update For Regional Bank Basket Strategy As Of 2/8/16 - South Gent | Seeking Alpha

This basket has a minimum out-of-pocket exposure of $40K and a maximum of $80K. For the last six months or so of 2015, I was hovering around $4K to $6 below my minimum level for the reasons discussed here:

Update On Regional Bank Basket Strategy As Of 7/17/15 - South Gent | Seeking Alpha

With several recent and small adds, I have moved slightly over my $40K minimum level.

My net realized gain in this basket strategy currently stands at $25,467.49: 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.

Over the life of this basket strategy, I anticipate that dividends will generate about 40% of my total return. Over the past 4 years ending 12/31/15, dividends have averaged $1,939.37 per year.

The dividend yield of this basket is significantly in excess of the yields provided by regional bank ETFs that include a large number of low yielding stocks and several that pay no dividends.

I am doing most of my small odd lot trades in my IB account where my commission rate is $1.

Comparative Data From the St. Louis Federal Reserve:

Net Interest Margin for all U.S. Banks (abbreviated to "NIM")

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

Net Percentage of Domestic Banks Tightening Standards on Consumer Loans, Credit Cards-St. Louis Fed (trending toward zero)

Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Large and Middle-Market Firms-St. Louis Fed (recently increased over zero)

Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Small Firms-St. Louis Fed (recently increased over zero)

This is what the data looks like for loans to small firms since 10/1/2003:

Sourced: research.stlouisfed.orgNet Percentage of Domestic Banks Tightening Standards for Auto Loans

Basket as of 2/19/16: I do not own the regional bank ETFs KRE and QABA. I include their symbols in this basket for comparison purposes:

I am not tracking shares bought with dividends in this table. The yields shown are based on the market closing prices rather than my constant cost yields.

The basket slightly outperformed the two regional bank ETFs last Friday. My dividend yield is substantially higher than those ETFs.

Regional bank ETFs have had a bad year so far and a worse three months.

Through last Friday, the S&P Regional Banking ETF (NYSEARCA:KRE) has total returns of -16.79% YTD and -22.19% for 3 months based on net asset value per share.

The Community Bank Index Fund (NASDAQ:QABA) is doing better as smaller is beating bigger (-12.3% YTD and -17.07% over 3 months).

A number of my small banks are doing better but still struggling to show a positive total return:

Bridge Bancorp -3.68% YTD

Bar Harbor Bankshares -1.93% YTD

CARE Carter Bank & Trust No Change YTD

Washington Trust Bancorp -5.34%

First Bancorp -7.23%

Lake Sunapee Bank Group +.77%

West Bancorp -9.92% (5 year average annual total return= 20.57%)

Bank stocks have been hurt primarily by a decline in interest rates so far this year IMO. The banks mentioned above do not have energy loans.

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There is a theme running through the following buys:

(1) Low 1 Year Anticipated P.E.G. ratios

(2) Well Below Market Forward P/Es, and

(3) Above Average Dividend Yields

Charge-offs for regional banks are near historical lows in the aggregate and NPL's are trending below 1% for the banks that I will buy as part of this basket strategy. Loans and deposits are increasing at favorable percentages. The problem remains NIM contraction.

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1. Added 50 UVSP at $19.15-Satellite Taxable Account:

Trade Snapshot:

I am reinvesting the dividend for the 200+ shares owned in this satellite account. I am not reinvesting the dividend for the 50 shares owned in the IB account.

Dividends: UVSP is currently paying a quarterly dividend of $.2 per share. Univest - Stock Splits & Dividends

At a total cost of $19.15, the dividend yield is about 4.18%.

The $.2 penny rate has been in effect since the 2006 third quarter. Prior to that time, the dividend has been raised several times rising from $.0233 in 1991. With a payout ratio near 50%, the Board probably wants to see more earnings growth before starting a dividend increase cycle again.

While dividend stagnation is certainly a negative, the bright side is that this bank did not cut the dividend during the recent Near Depression which was a common occurrence.

Recent Earnings Report: For the 2014 4th quarter, Univest reported net income of $7.2M or $.37 per share, up from $.32 in the year earlier period.

There were several extraordinary expenses in 2015 as outlined in the following quote:

"The quarter and year-to-date financial results include the Valley Green Bank acquisition which Univest completed on January 1, 2015 and now operates as Valley Green Bank, a Division of the Bank ("Valley Green Bank"). The results for the year ended December 31, 2015 included $2.0 million of integration and acquisition-related costs associated with Valley Green Bank, incurred during the first and second quarters, or $0.07 diluted earnings per share on a year-to-date tax affected basis. The fourth quarter and year-to-date results also include $540 thousand of acquisition-related costs associated with the pending acquisition of Fox Chase Bancorp, or $0.03 diluted earnings per share on a tax affected basis. Lastly, the results for the year ended December 31, 2015 also included $1.6 million of restructuring charges incurred in the second quarter, related to the consolidation of six financial centers in September 2015 under the Bank's optimization plan or $0.05 diluted earnings per share on a tax affected basis. Excluding these costs, net income for the year ended December 31, 2015, would have been $30.1 million or $1.54 diluted earnings per share."

The ratios below exclude the extraordinary expense items:

NIM: 3.8%

Efficiency Ratio: 66.67% (needs to come down some)

Coverage Ratio: 89%

NPL: .81%

Charge-Offs to Total Loans Annualized: .36%

ROA: .99%

ROTA: 1.06%

ROE: 8.42%

ROTE: 12.92%

Capital Ratios are okay:

Univest Corporation of Pennsylvania - Univest Bank and Trust Co. - Reports Fourth Quarter and Year End Earnings

Only one analyst provides earnings estimates. UVSP Analyst Estimates The estimate for this year is currently $1.65 and $1.88 next year or a Y-O-Y growth rate of 13.9% with a P/E of 10.16 based on the 2017 estimate and a $19.15 price.

Based on $19.15 Price and Current 2016 and 2017 Estimated E.P.S.

2017 Estimated P/E.: 10.16

Current Dividend Yield: 4.18%

1 Year Estimated P.E.G.: .8

PEG Calculator

I discussed this bank recently and have nothing further to add to that discussion. Update For Regional Bank Basket As Of 1/19/16 - South Gent | Seeking Alpha (scroll to 3. Added 50 of UVSP at $19.51-Satellite Taxable Account)

I also discussed Univest substantively in a July 2014 blog: Bought 50 UVSP at $18.8

I have sold one 50 share lot: Item # 3 Sold UVSP at $20.5 (July 2013 Post)(snapshot of profit=$253.1)-Bought 50 UVSP at $15.1 (March 2012 Post)

2. Bought Back 50 of 100 TOWN at $17.15:

Quote: Towne Bank (NASDAQ:TOWN)

A favorable article about this bank was published recently in Barron's: TowneBank and Seacoast: Small Banks With Big Potential - Barron's

Trade Snapshot ($1 Commission):

Prior Trade:

This 100 share lot position was eliminated as a result of a substantial reduction in the regional bank stock allocation: Update On Regional Bank Basket Strategy As Of 7/17/15 - South Gent | Seeking Alpha

I was premature in this disposition.

Company Description: "TowneBank operates 37 banking offices serving Chesapeake, Chesterfield County, Glen Allen, Hampton, James City County, Mechanicsville, Newport News, Norfolk, Portsmouth, Richmond, Suffolk, Virginia Beach, Williamsburg, and York County in Virginia, along with Moyock, Grandy, Camden County, Southern Shores, Corolla and Nags Head in North Carolina"

Total assets were about $6.17B as of 9/30/15

Valuation:

TOWN took off in price shortly thereafter, rising to slightly over $22 in what looks like a double top formation: TOWN Interactive Stock Chart The second top was near $22.5 last December whereupon the shares did a swan dive before finding a bottom near $16.75. It remains to be seen whether that price will be a bottom or whether the downtrend will resume.

I would classify a $22.5 market price as clearly overvalued for this bank, unless the bank can actually achieve the rapid rate of growth predicted by the two analysts covering this bank. TOWN Analyst Estimates

The consensus E.P.S. estimate for 2016 is just $1.26 (one estimate at $1.34 and the other at $1.17). The 2017 consensus E.P.S. estimate is currently $1.6 or a 26.98+% Y-O-Y increase. The forward P/E based on the 2017 consensus estimate and a $17.15 price is 10.72 which would be cheap with that growth rate.

The TTM P/E at $17.15 would be about 14.06 and that P/E would rise to 18.44 at $22.5.

Town reported 2015 E.P.S. of $1.22: TowneBank Reports Full Year and Fourth Quarter Financial Results for 2015 The results were impacted by 15.55M shares issue in connection with the acquisition of Franklin Financial Corporation effective 1/2/15.

In short, the current price would be within a fair valuation range based on the E.P.S. growing from $1.22 last year to $1.26 this year and would be undervalued with an acceleration to $1.6 next year. The stock would be excessively valued at $20 with a percentage E.P.S. gain similar to the 2015-2016 E.P.S. increase of 3.28%. That would bring 2017 E.P.S up to only $1.3 which would produce a 15.38 P/E at a low single digit growth rate based on a $20 price now.

Dividends: Towne is currently paying a quarterly dividend of $.12 per share. The dividend was raised from $.11 effective for the 2015 second quarter.

The dividend was maintained at $.08 per share for 23 quarters starting in 2007 first quarter. The rate was then raised in several increments to the current level. Towne Bank Dividend History

Ratios and Yield: Based on MP of $17.15 and Current E.P.S. Consensus Estimates for 2016 and 2017:

Current Dividend Yield at $17.15: 2.8%

P/E 2017 Estimated: 10.72

PEG: .5

A one penny raise this year would increase the yield to 3.03%. I am anticipating a raise effective for this year's second quarter.

Recent Earnings Report: For the 2015 4th quarter, TOWN reported diluted E.P.S. of $.24 compared to $.2 in the year earlier quarter. TowneBank Reports Full Year and Fourth Quarter Financial Results for 2015

The ROA, ROE and efficiency ratios are not good and are below what I would normally want to see before buying shares. The NPL ratio is good at .69%. The NIM is slightly above average.

Charge-offs for the quarter were excellent at (.01%), which means a net recovery.

The NPL ratio was excellent at .19%. The coverage ratio at .94% is fine, though I prefer to see over 100% when making an initial investment (i.e. the allowance set aside for loan losses exceeds already non-performing loans).

I view the capital ratios as okay or my way of saying "don't brag too much about them".

They are currently comfortably in excess of Basel III requirements but conditions do change.

Regulatory Capital Interim Final Rule

The Texas Ratio is good: Towne Bank - Financial Health - Texas Ratio

3. Added 50 BBT at $32.35-Satellite Taxable

Trade Snapshot

Closing Price Day of Trade: BBT: $32.38 +0.12 (+0.37%)(52 week high of $41.9 and 52 week low of $29.95 recently hit)

Prior Trade: Update For Regional Bank Basket As Of 9/23/15 - South Gent | Seeking Alpha (3. Bought 50 BBT at $35.23-Satellite Taxable Account)

This last buy was a typical average down, rounding a position up to 100 shares. I will consider selling the higher cost when and if I can do so profitably and after collecting several dividend payments.

Company Description: BB&T (NYSE:BBT) is a super regional bank. I own 50 shares of another super regional U.S. Bank (NYSE:USB). For the most part, I concentrate my attention on small and micro cap regional bank stocks. I do view BBT and USB to be the best super regionals.

BB&T Corp. operates as a holding company for Branch Banking & Trust Company that has "2,139 financial centers in 15 states and Washington, D.C., and offers a full range of consumer and commercial banking, securities brokerage, asset management, mortgage and insurance products and services."

BBT has approximately $210 billion in assets.

One website calculates the Texas Ratio for the operating bank at 7.78 (#11 Branch Banking and Trust)

Merger History: BBT has been an active acquirer of other banks. BB&T - Merger History Most of the earnings reports that I now recall reading have had extraordinary items relating to acquisition and integration expenses)

I have owned two smaller banks within the past two or so years that were takeover bait for this bank: National Penn and Susquehanna. The purchase of SUSQ has been closed; and NPBC is set to close on April 1, 2016. I still own National Penn shares and will probably take BBT shares in exchange for them. BB&T, National Penn Announce Expected Closing Date and Election Deadline Jan. 21, 2016

Dividends: Quarterly Dividend: $.27 per share

BB&T - Dividends and Stock Splits

Assuming a total cost per share of $32.38 and a $.27 per share quarterly penny rate, the dividend yield would be about 3.34%.

BB&T declares first-quarter dividends

P.E.G and Forward P/E Ratios:

The current consensus E.P.S. estimate for this year is $2.96 and $3.33 next year: BBT Analyst Estimates

2017 P/E Estimated at $32.38 price: 9.72

Estimated 1 Year P.E.G.= .9

Recent Earnings Report Highlights: For the 2015 4th quarter, net income was $535M or $.68 per share excluding merger-related and restructuring charges.

The efficiency ratio is excellent for a large bank. The ROA and ROE numbers are below average. The NIM is stable. The return on tangible equity is fine IMO.

The asset quality numbers are good especially for a big bank:

The capital ratios are okay:

BB&T reports revenue up 6.9% following acquisitions; Diluted EPS of $0.64 ($0.68 adjusted) Jan. 21, 2016

I have nothing else to add to my previous discussion except to note that the price went over $39 after my September 2015 purchase and has declined slightly over 20% from the current 52 week high of $41.9 using last Friday's closing price. BBT Interactive Stock Chart The stock is currently selling well below its 50, 100 and 200 day SMA lines.

It is commonplace now to see individual stocks in a technical bear market, meaning a greater than 20% decline from a 52 week high number. An article in Barron's points out that more "than 60% of S&P stocks are 20% below their 12-month highs; 37%, more than 30%." (emphasis added) Yet the SPX was down just 12.7% peak to trough.

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 BBT, TOWN, UVSP.