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
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Oct 2016 Update

October was basically a quiet month with OPEC failing – once again – to shore up their hold on the oil markets.  Chevron announced a small increase in their dividend maintaining their status as a Champion.  Several small positions were added at month end as the market began a pullback (continuing into November) enabling me to start redeploying funds received from PNY’s merger with DUK.  This month The S&P dropped 1.94%.  My portfolio was basically flat, ending down 0.1%.  Note: I normalized these numbers to consider the impact of cash infusion from the merger.  My ‘pure’ equity positions decreased by 4.15%.  The need for this normalization should end as my excess cash is used.  This increases my lead for the year to 11.5% with two months to go.

Headlines impacting my portfolio:

  • 10/3 – JNS to merge w/ Henderson
  • 10/11 – SRCE gains FRB approval for Sarasota, FL branch
  • 10/19 – C finalist to be designated as clearing firm for Renminbi trades

Blog Updates:

I’m a little behind again 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:

  • Closed PNY due to merger
  • Added to BMO
  • Added to CVLY prior to ex-div for the stock dividend
  • Added to JNS (weakness on currency exposure)
  • New position – ABM
  • New position – AMT (Jan)
  • New position -BLL
  • New position -CASY
  • New position -CHCO
  • New position -KOF (Mex. peso exposure)
  • New position -COKE
  • New position -CCE (UK exposure)
  • New position -CSAL
  • New position -CTBI (Jan)
  • New position -CCI
  • New position -HUM (Jan)
  • New position -LAMR
  • New position -NWFL
  • New position -OCFC
  • New position -ONB
  • New position -OUT
  • New position -PLD
  • New position -QCOM
  • New position -DGX (Jan)
  • New position -SRC (Jan)
  • New position – SGBK (Cuba exosure)
  • New position – BATRA
  • New position – VALU
  • New position  – VER (Jan)
  • New position  – YUMC (YUM spin-off)

Dividends:

  • October delivered an increase of 28.9% over October 2015.  This was due about evenly between dividend increases (Y/Y) and late 2015 funding.
  • October was down 10.68% from the prior quarter due to special and semi-annual payments in July.
  • Announced dividend increases currently average 12.59% with 67.11% of my portfolio having at least one raise so far this year.
  • Through October, dividends received exceeded total 2015 dividends by 7.2%.

Roughly half of the PNY/DUK proceeds have been redeployed with an additional 3 orders pending for January payers.   I’ve filled some of the hole I’ll face in January, so I plan on maintaining a small cash position through the election before making further decisions.

Spinoffs:

The XRX spin (Conduent) is on track to complete by year end.  MetLife has filed for a spin of their Brighthouse Financial unit under the ticker BHF.

Mergers:

Proxies were received and voted for both the LSBG/BHB and AGU/POT mergers.

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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