Thursday, March 12, 2015

UPDATE for Regional Bank Basket as of 3/12/15

Today seemed like a good day to update the regional bank basket. 

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. 

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

The dividend yields contained in the following table are calculated by Yahoo Finance based on today'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. 

Since I am increasing my exposure some in 2015, I would anticipate that the total dividend amount will be higher than in previous years. 

Regional bank stocks churned in price during 2014, as interest rates started to go back down. 

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. 

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%:

2014 4th Quarter: NPL Ratio at 1.96%/Down From High at 5.64%

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

I prefer to buy regional banks with a NPL ratio less than 1%.

2014 4th Quarter: Charge Off Ratio .49% 
Total Net Loan Charge-offs to Total Loans for Bank

Most of my banks are reporting charge-off ratios of less than the national average shown above.

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.

Net interest margin compression continues to be the main problem: 

2014 4th Quarter: 3.1% NIM 
Most of my regional banks have higher NIMs.

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

Return on Equity remains subpar by historical standards but has recovered:

2014 4th Quarter: 8.91%

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

I will focus on regional banks that are consistently reporting ROE numbers above 10%.

Return on average assets (ROA) is closer than ROE to historical highs:

I prefer to buy banks with ROA numbers over 1%.

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

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.  Rates started to drift back down when the ten year treasury hit a 2.2% yield. 

Some recent discussions on Financials and Interest Rates can be found in these SA Instablogs: 

 Increased Exposure To Financial Sector: Bought The Vanguard Financials ETF (VFH) - South Gent | Seeking Alpha

An Analysis Of The Risk/Reward Balance For Intermediate And Long Term Treasuries - South Gent | Seeking Alpha

Added To METLIFE (MET) - South Gent | Seeking Alpha

Transactions Since the Last Update: 

I will discuss in the next blog buying back LBAI. 

Bought Back 50 CIZN at $18.76-Regional Bank Strategy (3/12/15 Post)

Bought 50 FITB at $19.36 (3/2/15 Post)

There were no sells.

Realized Gains To Date: $17,957.38

Click to Enlarge

Update for Regional Bank Basket as of 3/12/15
The basket was up 2.71% compared to 2.62% for KRE. 

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)

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