Friday, February 13, 2015

Update for Regional Bank Basket as of 2/13/15 /Added 100 FNLC at $16.81/Recent Earnings Discussions for BHB, FNB, FFBC, NPBC, WTBA and BKSC Only

This strategy is explained in my Gateway Post on this topic:

Snapshots of realized gains and losses can be found at the end of that post.

Last Update: Stocks, Bonds & Politics: Regional Bank Basket Update as of 1/2/15

This basket will be updated randomly, usually within 1 to 2 months after the last update.

The dividend yield showed in this table is calculated by Yahoo Finance based on yesterday's closing prices. 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 dividend yield will be higher.

Dividend Yields 5% or higher: Based on Total Cost
NYCB: 8.44%
WASH: 8.34%
UBSI: 7.66%
FNLC: 5.38%
CBU: 5.15%
CCNE: 5.%

I am not tracking reinvested dividends in the following table. The unrealized gains per holding do not include reinvested dividends.

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 exposure between $40,000 to $50,000.

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%

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.

Regional bank stocks churned in price during 2014 as interest rates started to go back down. One of the regional bank ETFs, KRE, closed at $40.61 on 12/31/13 and closed the year at $40.70 -0.44 (-1.07%). SPDR S&P Regional Banking ETF Chart

I have bought and sold that low yielding ETF: Bought Taxable Accounts: 50 KRE at $39.55 (9/20/14 Post)- Sold 50 KRE at $41.35 (1/15 Post)

Net Interest Margin (the honey pot for regional banks)

3.09% 2014 3rd Quarter

Net Interest Margins-Forbes Article November 2014 
"Big Banks Poised to Ride Rising Rate Tide" (9/2014 WSJ)

It is just tougher to grow earnings when the net interest margin narrows rather than expands.

The abnormally low rates benefited banks some when deposit yields were repriced down, but even 5 year bank CDs taken out in 2008 at higher rates have now matured, and the positive impact of that repricing is no longer present to any meaningful degree. 

Instead, the decline in rates for loans simply compresses net interest margin. When rates were rising in 2013, regional bank stocks were in an uptrend based on the common belief that higher intermediate and long rates would be a net positive for them, particularly when short terms were likely to remain near zero through mid-2015 and then rise slowly and modestly in 2016-2017. The rate spike starting May 2013 and ending in December 2013 impacted intermediate and long term rates. Short term rates remained anchored by ZIRP. 

In 2014 and so far this year prior to 2/2/15, intermediate and long term rates had been drifting down. Prices for regional bank stocks have been under selling pressure during that period of declining rates, a trend that may be aggravated when the FED starts to raise the federal funds rates that will increase the rates paid on deposits and thereby placing additional downside pressure on net interest margins. If the FED increases the FF this year by .5% and intermediate and long term rates remain stable at current levels, that would be unfavorable for regional bank stocks. 

A repeat of the rate rise between 5/2/13 and 12/31/13 would likely be a positive for regional bank stocks due to a common belief that regional banks are net beneficiaries of an interest rate rise. 

The yields shown in the table below are calculated by Yahoo Finance based on today's closing prices rather than at my total cost per share.

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%.

NPL Ratio

Charge Off Ratio

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.

Interest rates have been moving up since 2/2/15, probably in response to recent positive economic data, particularly the recent jobs report, in the context of abnormally low interest rates consistent only with a long term Japan Scenario for the U.S.

Transactions Since the Last Update: I discuss adding 100 FNLC in Item # 8 below.

Bought Back TRMK at $22.25-Regional Bank Basket Strategy (1/24/15 Post)

Sold 315+ TRST at $6.92 (1/11/15 Post) 

Net Realized Gains 2010 to Date: $17,957.38  (snapshots are in the Gateway Post) 
Dividends Received 2010 through 2014$8,454.91

Click to Enlarge

Regional Bank Basket as of 2/13/15
Last Friday was an uneventful day for this basket.  The ETF KRE rose $.14 or .35%.

Comparison Data From the St. Louis Fed:
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)

In the following section, I will just highlight a few of the recent earnings reports and discuss one recent purchase: 

1. National Penn (NPBC): For the 2014 4th quarter, NPBC reported adjusted net income of $26.5M or $.18 per share and further announced a stock repurchase program.

National Penn Bancshares, Inc. Announces $125 Million Share Repurchase Plan and Reports Fourth Quarter and Full Year 2014 Results

The performance numbers remain generally favorable:

NPL Ratio: .96%
Charge-Offs (annualized) as a Percentage of Total Loans: .12%
Total Capital Ratio: 15.16%
Tier 1 Ratio: 13.91%

National Penn Bancshares also declared a quarterly dividend of $.11 per share.

I am near break-even with my NPBC shares. I am reinvesting the dividend. Added 50 NPBC at $10.12 (9/29/14 Post); Added 50 NPBC at $9.85 (October 28, 2013 Post)Item # 2 Added 100 NPBC at $10.68 (8/17/13 Post)

I initially bought shares as a Lotto and still own those shares: Item # 1 RB Bought as Lottery Ticket 30 NPBC at $7.83 (4/26/11 Post)

2. FNB: F.N.B corporation reported 4th quarter net income of $37.3M or $.21 per share, up from $.18 in the year ago quarter. For 2014, E.P.S. was reported at $.8.

Except for the capital ratios, which are low for banks owned in my regional bank basket, the other performance ratios are okay (ROA) or good (efficiency ratio):

The following ratios are good in my opinion. I like to see a coverage ratio (allowance for loan losses to non-performing loans) over 100% when I purchase a bank stock.

NPL Ratio: .61%
NPA Ratio: .71%
Coverage Ratio: 172.06%
Charge Offs (annualized) To Total Loans: .17%

F.N.B. Corporation Reports Significant Revenue Growth and Record 2014 Net Income

I currently own 100 shares: Added 50 FNB at $7.8 (7/20/2010 Post); Bought 50 FNB at $11.25 (7/24/13 Post)

Prior to buying that 50 share lot in 2013, I had sold my highest costs lots using FIFO accounting and had kept the shares bought at $7.8 which I still own. Bought 50 FNB at $8.42 (May 7, 2010 Post) Bought 50 FNB at $9.36 (April 27, 2010 Post)-Pared FNB: Sold 50 at $10 and 50 at $10.18 (December 23, 2010 Post)

3. Bar Harbor (BHB): Bar Harbor Bankshares reported 2014 4th quarter net income of $3.1M or $.51 per share which included a net realized loss of $263K from the sale of securities, "reflecting the Bank's efforts to lower the duration of the portfolio and its overall interest rate risk profile".  While that loss does not sound like much, it does represent about 4.4 cents per diluted share for this small bank. I am not criticizing the decision to reduce duration and interest rate risk even if that requires taking a loss.

Bar Harbor Bankshares Increases Quarterly Cash Dividend 

I have not sold any BHB shares. The original purchase was a 50 share lot. Bought 50 BHB at $30 (2/10/12 Post) There was thereafter a 3 for 2 split giving me 75 shares. I added 25 shares after that split to bring my position up to 100 shares. Added to BHB at $26.34  (8/15/14 Post)

My total cost per share is currently $21.74. Regional Bank Basket Update as of 1/2/15 I have not reinvested the dividend.

4. Financial Institutions (FISI): For the 2014 4th quarter, Financial Institutions reported net income available to common shareholders of $7.6M or $.54 per share, up from $.43 for the 2013 4th quarter.

Net Interest Margin: 3.56%
NPL Ratio: .53%
Coverage Ratio: 272%
Efficiency Ratio: 58.59%
Charge Offs (annualized) to Total Loans: .32%
ROA: .98%
ROE: 10.96%
ROTE (return on average tangible equity): 14.12%

Capital ratios are okay, but would be at the low end for banks in my basket:

The consensus estimate, generated by 3 analysts, was for $.49 per share. FISI Analyst Estimates

Bought 50 FISI at $15.55; Added 50 FISI at $19.8

5. West Bancorp (WTBA): West Bancorporation reported 4th quarter net income of $5.8M or $.36 per share, up from .27 in the 2013 4th quarter.

The Texas Ratio is outstanding at 2.71%.

These numbers are excellent, except for net interest margin which is above average now, and all are moving in the right direction:

Bought 100 WTBA at $11.67 (6/29/13 Post)

6. Bank of South Carolina (BKSC): This small bank holding company is probably unknown to many investors who invest in this sector. There is no analyst coverage that I can find. As far as I can tell, I was the first person to write a SA article about this bank: Regional Bank Basket Strategy: Bought 50 Shares Of Bank Of South Carolina At $14.6-Bank of South Carolina Corp. (NASDAQ:BKSC) | Seeking Alpha

Bank of South Carolina reported net income of $1.191+M or $.26 per diluted share for the 2014 4th quarter, up from $.22 in the 2013 4th Q. The bank provides few details in its earnings press release. Earnings for the year increased by 7.9%. The 2014 diluted E.P.S. was $.96 up from $.91. ROA for the quarter was reported at 1.23%. ROE was given at 11.72%. The 10-Q, which will have more information, has not yet been filed.

7. First Financial Bancorp (FFBC): First Financial Bancorp reported 4th quarter net income of $18.6M or $.30 per share, up from $.07 in the year ago quarter. The 2014 4th quarter had several acquisition related items that are not expected to be recurring that reduced net income by $.02 per share. The Board declared a $.16 per share quarterly dividend.

I have taken some profits in FFBC shares and have a current average cost per share of $14.7. Item # 2 Added 30 FFBC at $14.24 (December 2012); Item # 2 Added 50 FFBC at $14.65 (June 2013 Post)

Pared Highest Cost Shares by Selling 55 FFBC at $17.31 (profit snapshot $110.59 LT) and Sold 57 FFBC at $17.03-Highest Cost Shares (profit $37.68)

8. Added 100 FNLC at $16.81 (see Disclaimer):

Snapshot of Trade:

This stock is lightly traded, and I used an All or None Limit Order.  On the day of my trade, the volume was 14,743 shares with a low hit at $16.81 and a high at $17. The 52 week high/low was then $18.54 and $15.52 respectively.

FNLC Historical Prices | First Bancorp, Inc (ME)

Company Description: The First Bancorp Inc.  (FNLC) is the bank holding company that owns the "The First" bank operating in Maine and  First Advisors (investments, trusts, financial planning, etc.)

The First Bank currently has 16 retail branches in Maine:

Pictures of the bank's branches can be found at The First Locations.

Most of the branches dot the Maine coastline in places like Calais, Eastport, Bar Harbor, Northeast and Southwest Harbor. There is a branch in Bangor.

At a $16.88 price, the closing price on 2/12/15, the trailing 12 month P/E is 12.32 and the dividend yield is 5%. FNLC Key Statistics

I just described two reasons for buying this stock.

FNLC SEC Filings

Company Website: First Bancorp

There are no analyst estimates that I could find.

The total annualized return was 9.26% between 7/14/1999 through 2/12/15. The calculator used to arrive at that number only has data going back to that start date.

The annualized total return for the S&P 500 was 4.397% between July 1999 through January 2015. There were of course two catastrophic stock market declines between those dates.

Prior Trades: I currently own 50 FNLC shares in another taxable account bought at $15.6 .

I have had one round trip trade. Item # 2 Sold 52 FNLC at $15.55 (6/15/2012 Post)(snapshot of profit $123.88)-Item # 3 Bought 50 FNLC at $12.79 (9/26/11 Post)

I was not then "favorably impressed" with recent earnings reports when I sold that odd lot back in June 2012. I have a slightly favorable view of recent earnings reports.

Dividends: FNLC is currently paying a quarterly dividend of $.21 per share or $.84 annually. At a total cost of $16.81, the dividend yield at that rate would be about 5%.

This company is one of the few that provides both the historical dividend rate and the dividend rate adjusted for stock splits and stock dividends.

On an adjusted basis, the quarterly dividend was at $.009 for the 1991 second quarter. The dividend has been increased by 2,233.33+% to the present $.21 per share rate, using an online calculator to compute the percentage increase. The annualized 10 year dividend growth rate is 9.17%.  Calculator,

I just described a third reason for buying the stock. Hopefully, the bank will return to more robust dividend growth.

There was a dividend cut from a split adjusted $.012 to $.009 in 1991 that coincided with a recession and the savings and loan crisis, one of the many prior banking debacles.

There have been a few extra dividends paid in the 4th quarter, but that has not been done since 1999. The dividend was not cut during the recent Near Depression period, but the quarterly rate remained unchanged at $.195 starting in the 2008 third quarter through the 2013 third quarter.

The First Bancorp: Dividend History

Last Earnings Report: The First Bancorp reported net income of $14.7 million, up 13.5% from 2013. E.P.S. rose 14.2% to $1.37 per share. E.P.S. for the 4th quarter declined to $.32 or down  $.01 Y-O-Y.

During 2014, loans increased by $41.2M or 4.7%.

Some Relevant Financials: 

"Net chargoffs in 204 were $2.3 million or 0.26% of average loans on an annualize basis, compared to $5.2 million or 0.60% of average loans in 2013".  The 2014 charge-off number is goo as is the trend down.

The net interest margin is on the low side for my regional bank stocks, but the bank did manage to increase it slightly to 3.1%. The efficiency ratio was good at 56.86% as of 12/31/14. I like to see that number below 60% which is my marker for efficient operations. It was important to me to see the NPL ratio trending down after accelerating into 2011. As of 12/31/14, the NPL ratio ha declined to .97% from 1.44% as of 12/31/13, so it is moving in the right direction at least for now. The dividend payout ratio is a little high at 60.14% but down from 65.42% as of 12/31/13 even with a dividend increase last year.

Capital ratios are good and can be found at page 67 of the 2014 third quarter 10-Q:

FNLC-Q/E 9/30/14 Form 10-Q

Historical Earnings-Near Depression Period: I am always interested in how a bank performed during the recent Near Depression and the slow recovery that has followed that near total collapse of the world's financial system. I have already mentioned one important metric. FNLC did not cut its dividend. I also want to know whether the bank remained profitable during the most significant economic downturn since the Great Depression. This will give me some insight into whether the bank is run by a bunch of cowboys or worst, the infamous Masters of Disaster that populate so many U.S. banking institutions,  or is operated with prudent risk taking.

I can find the relevant data by looking at one of the historical 10-K filings. I will generally pick the 10-K filed in 2012.

I took a snapshot of the relevant information found at page 21:

2007-2011 Results
The bank remained profitable between 2007 through 2011. The return on tangible equity numbers remained above 10%. Book value and tangible book value increased during the period. Non-performing loans to total loans (NPL Ratio) remained below 2% in 2008-2009. I then see what caused me to sell the stock in 2012. The NPL ratio accelerated to 3.21% in 2011 and E.P.S. declined to $1.14 in 2011 from $1.22 in 2009. The bank needed to be going the other way in those numbers with an ongoing economic recovery.

Rationale: I have already highlighted the reasons for buying more shares.

1. The P/E based on trailing 12 month earnings is reasonable at slightly over 12.

2. The dividend yield is about 5% at my purchase price, and the bank does have a history of growing its dividend.

3. The bank appears to be prudently managed based on its ability to earn a profit and to maintain its dividend during and after the worst financial crisis since the Great Depression. This gives me some confidence that the bank will weather less severe, future economic downturns which will occur. The only questions are when, how many, how long and how deep.

I would be satisfied with an annualized total return of 8% to 10% with the dividend providing more than 1/2 of that return.

Risks: The company summarizes risks incident to its operations starting at page 10 of its 2013 Annual Report.

With small banking institutions, results can be nicked significantly when a million dollar loan goes bad. I doubt that Jaimie Dimon is informed of a deteriorating credit of that size.

Regulatory expenses tend to knick the smaller banks more as a percentage of revenues and earnings.

Bank stocks will perform badly during a recession and potentially worse than the overall market.

Net interest margin has been a problem for all banks due to the abnormally low interest rate environment that has compressed their spread between interest costs and interest income.