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Update For Regional Bank Basket Strategy As Of 8/18/2016

|Includes: BKSC, CARE, FFBC, HBAN, KeyCorp (KEY), RF, SONA

I will be taking one week off before writing and publishing another blog. I will continue to leave and respond to comments.

The Mad Hatter has used the Instablog forum yet again to announce yet another Global Strategy Luncheon, this time in Portland Oregon, that only costs $208 per person. Arrive early, and you can get some one on one time with the MH. That post moved his Instablog up to #13, just behind the Superinvestor Bulletin which is yet another advertisement masquerading as a blog.

My Global Strategy Luncheon will be held the same day at the Krystal in Franklin, TN. I may forget about it so don't count on me being there for one of Left Brain's long-winded dissertations which the Old Geezer finds tiresome anyway. Everything will be Dutch so be sure to bring $6 to $8 with you.

I see that my gambit relating to changing my appearance, discussed in the last post, and the publication of substantive posts and comments, did not improve my ranking, as I declined to #19 rather than moving up. I just figured out that I am writing too many comments and posts that have substance so I need to slow down or change my Moniker to Wide Awake and Ready To Party in the Alps.


This topic was last updated here: Update For Regional Bank Basket Strategy As Of 7/26/16 - South Gent | Seeking Alpha

The Regional Bank Basket is one of my industry sector baskets. A sector basket will generally contain 20 to 40 stocks. The dividend yield will be substanitally higher than a comparable sector ETF and there will be profit taking and trading the natural volatility of stocks up and down.

My net realized gain in this basket strategy currently stands at $28,533.98 (small lot trades): 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.

Charge-offs for regional banks are near historical lows in the aggregate and NPL's have been mostly 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 and that problem is likely to get worse Y-O-Y based on recent interest rate movements.

I have been paring my exposure to regional banks given the near term outlook for net interest margins. The decline in interest rates over the past few months means that the operating environment for banks has gotten even tougher. Net interest margins will likely remain under pressure through 2016 and possibly into 2017.

I am consequently continuing to trim the size of this basket.

The countervailing considerations include the following: (1) still low charge-offs; (2) a significantly higher yield than the ten year treasury; and (3) an unexpected surge in inflation that causes the FED to raise short term rates and undermines the Bong Ghouls thesis that abnormally low inflation will last until the Second Coming.

Interest Rates and Inflation: NIM Expansion on the Horizon?

Over the past twelve months ending in July, CPI rose .8% while core CPI was up 2.2%.Consumer Price Index Summary

The primary deflationary force was energy prices:

Energy prices are about to turn up Y-O-Y and will most likely add to inflation in the coming months rather than detract from it.

WTI closed at $41.93 per barrel on August 17, 2015 and at $46.81 yesterday

Cushing, OK WTI Spot Price FOB (Dollars per Barrel)

Spot Prices for Crude Oil and Petroleum Products

The Bond Ghouls still do not see inflationary pressures building up based on the break-even spreads priced in the 5, 10, 20 and 30 year TIPs.

5-Year Breakeven Inflation Rate-St. Louis Fed

10-Year Breakeven Inflation Rate St. Louis Fed

At the close today, the break-even inflation rate for the five year TIP was 1.32%. The buyer of the 5 year TIP would be better off buying that instrument rather than the 5 year nominal treasury provided the annual average CPI rate was greater than 1.32% over the next five years. Many investors view the break-even inflation rate as the market's forecast for the average annual rates of inflation. So the market's inflation prediction today was for an average annual CPI increase of just 1.32% for the next five years.

The Atlanta Fed's Sticky Price Index was up 2.6% over the twelve month period ending this last July: Sticky-Price CPI - Federal Reserve Bank of Atlanta

The Cleveland Fed's Median CPI Index is also up 2.6% over the 12 months.

The probability of just one .25% hike in the FF rate on or prior to 7/26/2017 is only 41.7% based on the odds given by the Bond Bookies today (8/18/16). The odds of two .25% increases on or before July 2017 are given at 17.9%. Countdown to FOMC - CME Group An increase of .25% at the FED's December meeting is at 40.3%.


Basket as of 8/18/16

I am not tracking shares bought with dividends in this table.

As a result of Keycorp's acquisition of First Niagara, I received some cash and KEY shares for my FNFG shares as explained below.

As previously discussed, BHB is acquiring LSBG and I will receive about 50 BHB shares for my 100 LSBG when the merger is consummated. BHB is one of the few stock in this basket where I have yet to sell a share. My worst pare was selling 50 of the 100 WASH shares bought at $15.26 (1/14/2010)-Item # 2 Sold 50 of 100 WASH at $22.44 (1/5/11 Post)


I am downsizing my portfolio as I do from time to time. For the most part, I have been eliminating or paring lower yielding bank stocks or recently purchased small lots in anticipation of hopefully expanding the basket again after a correction. Even though I harvested some profits, my unrealized gain rose about $100 since my 7/26/16 update.

The most rapid knock down occurred in the 2015 summer: Update On Regional Bank Basket Strategy As Of 7/17/15 - South Gent | Seeking Alpha


1. Sold 100 RF at $9.18:

Trade Snapshot:

Profit Snapshot: $63.48

For anyone unfamiliar with IB, the first column shows that I sold 100 shares at $9.18 and closing price that day was at $9.17.

Item # 1. Averaged Down Bought 50 RF at $7.95: Update For Regional Bank Basket Strategy As Of 1/28/16 - South Gent | Seeking Alpha

Item # 1. Bought 50 Region's Financial at $9.08: Update For Regional Bank Basket Strategy As Of 1/28/16 - South Gent | Seeking Alpha

Realized RF Gains to Date: $227.64

Recent Earnings Report: Lackluster IMO

Regions Reports Earnings of $259 Million and Earnings Per Share of $0.20 for the Second Quarter of 2016

The $.2 E.P.S. was unchanged from the 2015 second quarter, which highlights the headwinds facing regional banks in increasing earnings.

NIM 3.15%

Net Charge-Offs to Average Loans: .35%

Average Loans Up 4% Y-O-Y

NPAs = 1.61%

Tangible Common Book Value Per Share = $9.92, up from $8.97 as of 3/31/16 and $8.37 as of 6/30/15

Tangible Stockholders Equity to Tangible Assets 9.57%

"Additionally, during the second quarter, Regions completed the annual Comprehensive Capital Analysis and Review (CCAR) process and received no objection regarding planned capital actions. In addition to continuing the $0.065 quarterly common stock dividend, planned capital actions include the repurchase of up to $640 million in common shares over the next four quarters and the potential for a dividend increase beginning in the second quarter of 2017. The $640 million share repurchase program was approved by the Board of Directors on July 14, 2016, and the potential dividend increase will be considered by the Board of Directors in early 2017."

2. Sold 50 BKSC at $16.81:

Trade Snapshot:

Profit Snapshot: +$53.48

Item # 2. BOUGHT 50 BKSC AT $15.7: Update For Regional Bank Basket Strategy As Of 5/28/16 - South Gent | Seeking Alpha

Company Description: The Bank of South Carolina (NASDAQ:BKSC) is the holding company for the Bank of South Carolina which has four banking offices in the Charleston, S.C. area.

Trading Profits to Date: $188.89 (two 50 share lots)

3. Sold 100 of 150 SONA at $13.12:

Trade Snapshot:

Profit Snapshot: +$66.97

Item # 2. Bough Back 50 SONA at $12.6: Update For Regional Bank Basket Strategy As Of 3/17/16 - South Gent | Seeking Alpha

2. Added 50 SONA at $12.24: Update For Regional Bank Basket Strategy As Of 4/8/16 - South Gent | Seeking Alpha

I have kept a 50 share bought at $11.89 (6/6/16) and referenced in the introduction section here: Update For Regional Bank Basket Strategy As Of 6/22/16 - South Gent | Seeking Alpha

Prior Trade: I sold 200 shares last December. Update For Regional Bank Basket Strategy As Of 12/28/15 - South Gent | Seeking Alpha (scroll to 1. Eliminated SONA at $12.8 and $12.98-Two Taxable Accounts 100 Shares in Each/Profit Snapshots=$206.24).

SONA Trading Profits To Date: $273.21

Closing Price Today: SONA $12.85 +$0.06 0.47%

4. Sold 52 FFBC at $21.25: This was a pare of higher cost lots held in a Fidelity taxable account.

Quote: First Financial Bancorp (Ohio) (NASDAQ:FFBC)

Trade Snapshot:

Profit Snapshot: +$280.72 from 8/1 Disposition

The 50 share lot was bought last January and was discussed here: Bought 50 FFBC at $15.46: Update For Regional Bank Basket Strategy As Of 1/28/16 - South Gent | Seeking Alpha

My prior pare was to sell a 50 share lot bought at a $15.77 total cost per share last January: 1. Sold 50 FFBC at $20.11: Update For Regional Bank Basket Strategy As Of 7/12/16 - South Gent | Seeking Alpha

Total FFBC Trading Profits to Date= $688.97 (includes two other small trades referenced in the Appendix)

Starting with the 2011 third quarter dividend and ending two years later, this bank was paying out 100% of its net income as a dividend, generating yields in excess of 6%. The regular quarterly rate was $.12 per share and then there was a special quarterly dividend representing the net income per share and that regular rate. The last dividend to include the special component was paid in the 2013 third quarter. Cash Dividends | First Financial Bank I have harvested the shares bought with all of the dividends profitably, thereby enhancing their value.

The currently quarterly rate is $.16 per share.

I am down to a small 84+ share lot that has a total average cost per share of $14.69:


Item # 2 Added 30 FFBC at $14.24 (December 2012 Post); Item # 2 Added 50 FFBC at $14.65 (June 2013 Post)

I am no longer reinvesting the dividend. There are only 4.242 shares remaining that were bought with dividends and all of those were bought at prices lower than $15.

It is not necessary for me to implement this kind of strategy perfectly which would be impossible anyway.

I will consider buying when the shares plummet which happened with FFBC early this year. I bought 100 shares at less than $16. The flip side is that I need to consider selling higher cost shares when the shares pop, as they have over the past several weeks.

This trading strategy is in part designed to preserve capital and to make the least amount of money work harder. At the current annual rate of $.64 per share and my total cost of $14.69, my current dividend yield is about 4.36%. All of the shares purchases with dividends were sold profitably, added to the overall dividend yield which exceeded 7% when FFBC was paying a special dividend on top of the regular dividend.

I also had a typical multi-year profit harvesting of the highest cost FFBC shares that is part of plan to keep me at or near the 15% tax bracket. Most of my income is taxed at a maximum rate of 15%, being either qualified dividends or long term capital gains. I am retired with no earned income and no pension other than SS. I will offset some short term capital gains with capital losses, depending on whether interest and other non-tax favored income is taking me into another tax bracket. The capital losses are taken when the loss is more valuable than the hope that the stock will recover.

Closing Price Today: FFBC $21.47 +$0.04 0.19%

5. Sold 50 HBAN at $9.38:

Trade Snapshot ($1 Commission):

Profit Snapshot: +$39.54

Item #1. Bought Back 50 HBAN at $8.55Update For Regional Bank Basket As Of 3/4/16 - South Gent | Seeking Alpha

That post has snapshots of prior small lot trades.

HBAN Trading Profits To Date: +$454.86

Last Earnings Report: Lackluster IMO

Huntington Bancshares Incorporated Reports 2016 Second Quarter Net Income of $175 Million and Earnings per Common Share of $0.19

"net income for the 2016 second quarter of $175 million, a $22 million, or 11%, decrease from the year-ago quarter. Earnings per common share for the 2016 second quarter were $0.19, down $0.04, or 17%, from the year-ago quarter. FirstMerit acquisition-related expenses totaled $21 million pretax, or $0.02 per common share. Return on average assets was 0.96%, while return on average tangible common equity was 11.0%. Total revenue increased 1% over the year-ago quarter.

net interest margin of 3.06%, a decrease of 14 basis points

$0.58, or 9%, increase in tangible book value per common share (TBVPS) to $7.29

$4.0 billion, or 8%, increase in average loans and leases, primarily driven by a $2.1 billion, or 26%, increase in automobile loans and a $1.5 billion, or 8%, increase in commercial and industrial (C&I) loans

net charge-offs declined to 0.13% of average loans and leases, down from 0.21%, benefiting from continued commercial real estate (CRE) net recoveries

Tangible common equity / tangible assets ratio 7.96%"

6. Sold 50 of 250 CARE at $13.75: Part of Highest Cost Lot

Company Description: The stock of Carter Bank & Trust (Martinsville VA) is lightly traded on the pink sheet exchange. Carter was created by the merger of 10 banks back in 2006. Carter operates 123 branches in Virginia and North Carolina: Carter Bank & Trust, FAQs

The headquarters is located in Martinsville, Virginia.

Office Locations

CARE Key Statistics

Link to 2015 Annual Report.pdf (risks factors summarized starting at page 13)

The bank owns 118 banking offices free and clear of any encumbrance (Page 16).

Trade Snapshot ($1 Commission):

Profit Snapshot: +$34.99

This lot was part of a 100 share lot bought in my IB account: 2. Added 100 CARE at $13.02: Update For Regional Bank Basket Strategy As Of 4/19/16 - South Gent | Seeking Alpha

This disposition lowers my average cost per share a tad.

The lowest cost lot, which is still owned, was bought at $12.55.

I still own another lot bought at $12.6: Item # 3. Added 50 CARE at $12.6: Update For Regional Bank Basket Strategy As Of 5/28/16 - South Gent | Seeking Alpha

7. KEY Completed its Acquisition of FNFG: KeyCorp Closes Acquisition Of First Niagara Financial Group

I will not miss First Niagara. I received 204+ Keycorp (NYSE:KEY) shares plus $691.31 in exchange for my 300+ FNFG shares:

Profit as Computed By Broker Related To The Cash Component (all shares purchased with dividends as shown below) = $61.11:



Pared Highest Cost Shares by Selling 55 FFBC at $17.31 (11/1/2014 Post)(profit snapshot $110.59)-ADDED 50 FFBC at $14.87 (12/1/2011 Post)

Sold 57 FFBC at $17.03-Highest Cost Shares (profit $37.68)-Item # 3 Added 50 FFBC at $15.95 (August 2012)

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 KEY, SONA, FFBC, CARE.