Small Banking Revisited

Periodically I encounter an article that hits at the core of one of my strategies.  As many of  you know, I’m currently a little overweight financials with an emphasis on regional banks.  This was not always the case as I (fortunately) exited the sector in late 2007  reentering only in early 2013.  My five year pause was bookended by what Richard J. Parsons refers to as the Great Panic of 2008-2009.  His article, Finding Alpha In Reliable Dividend Banks(14 June 2017) struck a chord with me and illustrated some of the style I came to embrace for a time. Though I’m not selling my banks, other than special situations, I’m currently not a buyer either.  If you are a bank investor (or considering being one) I’d recommend reading his article.

His article highlights 30 regionals that actually raised dividends during the Panic.  By comparison, my hypothesis was segmented into three ‘buckets’ which were:
1.Good dividend payers
2.Stock dividend payers
3.Acquisition candidates

Although he includes some stock payers (CMBH, AROW, SBSI, and FLIC (roundups on splits)) this is not his article’s focus.  I’ve written on these before so I’ll exclude them.

His article also points out that only one of the original 30 was acquired which is a slight disappointment when one of my goals is to obtain a merger premium.  Several on his list were acquirers which kind of proves my rationale to expand the universe to include potential acquisition targets in my bank holdings a couple of years ago.

Leaving us with his list.  One notable point is his geographic analysis.  “Certain states are more likely to be home to these reliable dividend banks: Indiana, Texas, California, Kentucky, Missouri, and upper state New York.”  This melds with my findings though I attributed this to state regulatory agencies as certain states had disproportionate numbers of bank failures.  Therefore I excluded western (California) and southern US banks.  To his mix, I found Pennsylvania to be a viable candidate as well.  This difference could be that mutual conversions (notably preeminent in PA, NY, NJ, VA and MA) were identified as likely targets by my study.

Another note on his analysis, “…a few critical factors influence long-term success in banking: hands-on expert management…”  In fact he elaborates a little on this in the comment stream.  A tidbit is both Missouri banks on his list were established by the Kemper family.

So the actual question is how do my portfolio holdings stack up against his list?  Half of the thirty are owned.  Of the nine owned by Richard, seven are owned (one obtained via a merger).  One being in California was excluded by geographic screening.  I’m not sure offhand though, why I excluded CBU out of New York.  My primary takeaway from his article was a validation of my strategy and I need to further investigate a few.

His complete list follows:

Access National ANCX 1.4B VA
Arrow Financial Corp. AROW 2.7B NY
Auburn National Bancorp AUBN .8B AL
BancFirst Corp.   BANF 7.2B OK
Bar Harbor Bankshares  BHB 3.4B ME
Bank of Marin Bancorp BMRC 2.0B CA
Bryn Mawr Bank Corp. BMTC 3.3B PA
Bank of Oklahoma   BOKF 32.6B OK
Commerce Bancshares   CBSH 25.3B MO
Community Bank System CBU 8.9B NY
Cullen/Frost Bankers CFR 30.5B TX
Community Trust Bancorp CTBI 4.0B KY
First Capital  FCAP .8B IN
First of Long Island Corp.  FLIC 3.6B NY
Farmers & Merchants Bancorp  FMCB 3.0B CA
Horizon Bancorp   HBNC 3.2B IN
National Bankshares NKSH 1.2B VA
Norwood Financial Corp.  NWFL 1.1B PA
Bank of the Ozarks OZRK 19.2B AR
Prosperity Bancshares  PB 22.5B TX
People’s United Financial, Inc.   PBCT 40.2B CT
Stock Yards Bancorp  SYBT 3.0B KY
Tompkins Financial Corp.  TMP 6.3B NY
United Bankshares UBSI 14.8B WV
UMB Financial Corp.  UMBF 20.6B MO
Westamerica   WABC 5.4B CA
Washington Trust  WASH 4.4B RI
First Source  SRCE 5.5B IN
First Financial THFF 3.0B IN
Southside Bancshares SBSI 5.7B TX
Bold-owned by Richard, Italics-owned by me

Sep 2016 Update

Last month saw the commencement of the Congressional take on the ‘bully pulpit’ with first Heather Bresch (Mylan (MYL)/EpiPen) then John Stumpf (WFC) called on the carpet.  One would think Heather would have been smart enough to avoid taking the same path blazed so brilliantly by Martin Shkreli (Turing/Valeant (VRX) fame).  Her show was overshadowed by the even greedier Wells Fargo with John either portrayed as ‘asleep at the wheel’ or a criminal mastermind.  Wouldn’t life be interesting if Congress actually did anything other than use hearings to frame media sound bites?  The S&P was basically flat for the month ending down 0.12%.  My portfolio was basically flat as well, ending up 0.04%.  This increases my lead for the year to 11.88% with one quarter left to go.

Headlines impacting my portfolio:

  • 9/1 – CHD 2:1 stock split
  • 9/2 – Ireland to appeal EU anti-AAPL tax ruling
  • 9/6 – ENB to acquire SE
  • 9/12 – AGU/POT reach merger agreement
  • 9/19 – REITs officially become their own sector
  • 9/26 – YUM spin set at 1:1 YUMC for 10/31
  • 9/29 – Supreme Court agrees to hear credit card surcharge case
  •           – PNY/DUK merger approved, closing set for 10/3

Blog Updates:

I’m a little behind this month but the portfolio data has been compiled and will be posted in the next couple of days with the goals update later in the week.  The Unabridged portfolio should be next week as per normal.

Portfolio Updates:

  • FMBH replaced FCLF due to merger
  • Added to TOWN – this ‘makes whole’ this holding following my sale of MNRK prior to the merger.  (didn’t want to hold TOWN across two accounts)
  • Added to AROW prior to ex-div for the stock dividend (shares added Sept 29)
  • Added to SBUX

All were funded by dividends with no ‘new cash’ deployed.  New cash was deployed for the  annual funding of the trust I manage (skip generation).  The trust is excluded from my DGI portfolio and WFC is this year’s addition.  This is only the second time I’ve duplicated one of my holdings – the other being DIS.  The other trust holdings are GIS, HSY, PG, WMT, WGL, UNP, KHC and TXN.

Dividends:

  • September delivered an increase of 24.7% over September 2015.  This was due about evenly between dividend increases (Y/Y) and late 2015 funding.
  • September was up 4.4% from the prior quarter.
  • Announced dividend increases currently average 12.91% with 63.09% of my portfolio having at least one raise so far this year.
  • Through September, dividends received were equal to 95.7% of all 2015 dividends, keeping me on pace to exceed last year’s total -now estimated to be October 4th (as compared to 2015 being Sept. 9th).

With the cash from PNY/DUK, I’ll be looking to redeploy primarily into existing Jan/Apr/Jul/Oct payers within my portfolio with no new positions expected.  Losing PNY and the expected loss of LSBG (another merger) will leave about a 5.07% hole in my January dividend receipts unless I act now.

Spinoffs:

The YUM spin has been set for Oct 31st with YUMC to begin trading Nov 1st.  I don’t think the XRX spin date and ratio have been set.

 

 

April 2016 Update

April was generally favorable for the markets.  Earnings reports presented few surprises although the trend of beating analysts’ expectations while presenting lower year over year results continued.  Financials were modestly positive while old technology seemed to disappoint.  Until month end, the market was drifting higher.  Then Apple’s and Starbucks reports were weak, the BOJ failed to raise rates and Carl Icahn announced he sold his Apple position over China fears.  So the month ended basically flat managing a gain of .27% – at least it was positive.

My portfolio value managed a 2.66% gain with the weaknesses (KMB, SBUX and AAPL) being offset by M&A activity (Comcast (CMCSA) acquiring Dreamworks (DWA) and First Cloverleaf (FCLF) being acquired).

Blog Updates

  • I changed my portfolio reporting to measure % of dividends provided instead of market value.
  • Updated the Blog Directory

Portfolio Updates

  • Sold Monarch Financial (due to upcoming merger).
  • With the proceeds, initiated positions in SRCE, BKSC, CVLY and AROW
  • Moved CVX from DRIP to brokerage resulting in a fractional share sale
  • Added to LTXB prior to their earnings release.
  • Added to SBUX after earnings.
  • Added to AAPL after earnings(and the Icahn announcement)
  • Added to XRX – I anticipate a reverse split prior to – or in conjunction with – the spinoff.  So trying to position myself more favorably in this event.

Dividends

  • April delivered an increase of 38.7% over April 2015.  This was due primarily my first dividends from NJR and SJI coupled with dividend increases.
  • April was also up slightly from last quarter by 4.4%
  • Announced dividend increases currently average 10.05% with 48.6% of my portfolio having at least one raise so far this year. .

Recent Buy, Sell & More

  • Sold: Monarch Financial
  • Bought: Source 1, Arrow Financial, Bank of South Carolina, Codorus Valley Bancorp
  • Cancelled  Chevron DRIP

Today I made the decision to sell Monarch Financial.  This was going to be pulled from my account – probably later this month – anyway, so I chose to accelerate the process for these reasons:

  1. Locked in a 22% total gain over the past year and half
  2. Since I also own the acquirer, I didn’t want the same stock in two accounts
  3. In the event the merger fails (doubtful), could buy in cheaply

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