I noticed that Raymond James downgraded yesterday First Niagara from a strong buy to neutral based on the same concerns that I discussed in yesterday's post. Item # 2 FNFG While this bank is being negatively impacted by the Fed's Jihad, and the concomitant pressure on bank net interest margins, the main problem is the CEO's decision to buy branches from HSBC, in a geographic area where FNFG already has a number of branches, for close to 1 billion dollars. This will require a large capital raise primarily by the issuance of stock. I would agree with the RJ analyst's downgrade over the near term. I view the acquisition of the HSBC branches to be a mistake. Why would a bank add more branches in Buffalo? Prior to that pending acquisition, FNFG already had a #3 market share in the Buffalo region. The Buffalo News (16 HSBC branches in Buffalo, 3 Niagara Falls, 19 Rochester, etc: HSBC Branch Locations - NY)
Possibly, over the long term, the acquisition will have some minor positive impact, but the near and intermediate term negatives outweigh those potential longer term positives in my opinion. Nonetheless, FNFG has a number of positive attributes that make this bank a long term worthwhile hold in my Regional Bank Basket Strategy. REGIONAL BANK BASKET STRATEGY GATEWAY POST An imperial CEO is not one of those attributes. Those favorable attributes include the very low Texas Ratio, the excellent loan loss record as shown by the low NPLs to total loan ratio, the high dividend yield, and the growing geographic footprint in New England.
The Obama administration is going to make it easier for underwater homeowners to refinance their mortgages under the Home Affordable Refinance Program. WSJ Reuters Fox Business This was done by scrapping the requirement that the existing mortgage balance had to be below 125% of the current appraised value. Appraisals would no longer be required to even qualify for the new loan. It would only be necessary that the mortgage loan was sold to Fannie or Freddie before June 2009 and that the borrower was current under the existing mortgage (though allowing for one late payment over the prior 12 months but not in the last six). This appears to be a last ditch effort by the Obama administration to jump start housing prices before the next election.
There are certain moral issues involved with Obama's plan that are discussed in this editorial found at the CSMonitor.com. Many of the borrowers, who will now qualify for low interest rate loans, lied about their incomes in order to receive their existing mortgage. To qualify for the new loan, there would be no inquiry to determine whether the borrower committed fraud in connection with the existing mortgage.
Easy credit from financial institutions and mortgage fraud by borrowers were precipitating causes of the bubble in housing prices and their subsequent and inevitable decline. Mortgage fraud was almost completely ignored by law enforcement. Instead of punishing the wrongdoers, the federal and state governments have made numerous attempts to reward that behavior. The states make it difficult for the lender to foreclose, allowing the admittedly delinquent borrower to remain in the home rent free for months or even years. The federal government wants to relieve the borrower of the consequences of their mistake with taxpayer funds. That will be the inevitable result of this latest action to fix the housing debacle.
Another inevitable result will be that many borrowers will be rewarded by the government for submitting false statements about their income in order to qualify for their existing loan. And honest citizens will be on the hook for even more, as underwater borrowers renege on those refinanced loans and thereby increase the losses to Fannie and Freddie that have already turned into $130+ billion black holes.
It is one thing to pay for another's mistakes and quite another to pay for the consequences of another's fraud and/or greed.
The refinancing of higher rate mortgages with lower ones will have some deleterious impact on those mortgage REITs who buy GSE mortgage securities. Those funds will lose some of their higher yielding securities, thus narrowing the spread between their cost of funds and the yield on their securities portfolio.
1. Added 50 Bridge Bancorp (BDGE) Last Friday (own: Regional Bank Stocks Basket Strategy)(see Disclaimer): I averaged down by buying 50 shares of BDGE at $18 after reviewing this small bank's last earnings report.
Bridge reported net income for the third quarter of 2.8 million or 42 cents, up 20% from the third quarter of 2010. The estimate, made by just one analyst was for 38 cents. As of 9/30/11, NPLS tot total loans was 1.02%; the allowance for loan losses as a percentage of NPLs was 126.35%; the total capital ratio was 13.7%; the Tier 1 capital ratio was 12.4%; and the net interest margin was 4.04%.
Possibly, over the long term, the acquisition will have some minor positive impact, but the near and intermediate term negatives outweigh those potential longer term positives in my opinion. Nonetheless, FNFG has a number of positive attributes that make this bank a long term worthwhile hold in my Regional Bank Basket Strategy. REGIONAL BANK BASKET STRATEGY GATEWAY POST An imperial CEO is not one of those attributes. Those favorable attributes include the very low Texas Ratio, the excellent loan loss record as shown by the low NPLs to total loan ratio, the high dividend yield, and the growing geographic footprint in New England.
The Obama administration is going to make it easier for underwater homeowners to refinance their mortgages under the Home Affordable Refinance Program. WSJ Reuters Fox Business This was done by scrapping the requirement that the existing mortgage balance had to be below 125% of the current appraised value. Appraisals would no longer be required to even qualify for the new loan. It would only be necessary that the mortgage loan was sold to Fannie or Freddie before June 2009 and that the borrower was current under the existing mortgage (though allowing for one late payment over the prior 12 months but not in the last six). This appears to be a last ditch effort by the Obama administration to jump start housing prices before the next election.
There are certain moral issues involved with Obama's plan that are discussed in this editorial found at the CSMonitor.com. Many of the borrowers, who will now qualify for low interest rate loans, lied about their incomes in order to receive their existing mortgage. To qualify for the new loan, there would be no inquiry to determine whether the borrower committed fraud in connection with the existing mortgage.
Easy credit from financial institutions and mortgage fraud by borrowers were precipitating causes of the bubble in housing prices and their subsequent and inevitable decline. Mortgage fraud was almost completely ignored by law enforcement. Instead of punishing the wrongdoers, the federal and state governments have made numerous attempts to reward that behavior. The states make it difficult for the lender to foreclose, allowing the admittedly delinquent borrower to remain in the home rent free for months or even years. The federal government wants to relieve the borrower of the consequences of their mistake with taxpayer funds. That will be the inevitable result of this latest action to fix the housing debacle.
Another inevitable result will be that many borrowers will be rewarded by the government for submitting false statements about their income in order to qualify for their existing loan. And honest citizens will be on the hook for even more, as underwater borrowers renege on those refinanced loans and thereby increase the losses to Fannie and Freddie that have already turned into $130+ billion black holes.
It is one thing to pay for another's mistakes and quite another to pay for the consequences of another's fraud and/or greed.
The refinancing of higher rate mortgages with lower ones will have some deleterious impact on those mortgage REITs who buy GSE mortgage securities. Those funds will lose some of their higher yielding securities, thus narrowing the spread between their cost of funds and the yield on their securities portfolio.
1. Added 50 Bridge Bancorp (BDGE) Last Friday (own: Regional Bank Stocks Basket Strategy)(see Disclaimer): I averaged down by buying 50 shares of BDGE at $18 after reviewing this small bank's last earnings report.
Bridge reported net income for the third quarter of 2.8 million or 42 cents, up 20% from the third quarter of 2010. The estimate, made by just one analyst was for 38 cents. As of 9/30/11, NPLS tot total loans was 1.02%; the allowance for loan losses as a percentage of NPLs was 126.35%; the total capital ratio was 13.7%; the Tier 1 capital ratio was 12.4%; and the net interest margin was 4.04%.
2. Junk Bond Ladder Table (Junk Bond Ladder Strategy): The Old Geezer had to avert his gaze from this table, knowing that this picture had to be part of a horror movie, almost as terrifying as the Attack of the 50 Foot Woman (1958), where a woman grows to 50 feet after an alien encounter and goes after her cheating husband.
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| Junk Bond Ladder Strategy: Table as of 10/21/2011 |
3. General Electric (owned): General Electric reported a 11% increase in operating earnings for the third quarter last Friday morning. The adjusted E.P.S. was 31 cents, in line with estimates.Third quarter revenues were $35.4 billion, up 12% excluding the impact of NBCU divestiture. International sales rose 25%. However, revenues in GE's energy infrastructure business fell 9%. GE Capital continued its turnaround, earning $1.5 billion during the quarter. Margins declined in the big four industrial businesses. And, the earnings were aided by lower tax rates. The market did not care much for the results and took the shares down 1.92% in trading last Friday. The lackluster results from GE need to be contrasted with the report from Honeywell that sent its shares up 5.82% on Friday.
4. Bought 50 AVY at $25.71 Last Friday (see Disclaimer): I have traded this security on several occasions. However, my last round trip was over two years ago, starting with a 50 shares purchase at a total cost of $20.66 per share. I sold those shares at $29.97 in July 2009 after the company cut its quarterly dividend from 41 cents to 20 cents:
Thereafter, AVY continued to rise and traded at over $40 per share earlier this year. AVY Interactive Chart The most recent decline back to the mid 20s was apparently triggered by an earnings warning in mid-July 2011. SEC Filed Press Release The company lowered its forecast for the second quarter and 2011. The reason had to do with a sudden decline in orders from apparel makers and consumer goods companies for tags and labels.
Avery has a leading market share in pressure sensitive materials and a variety of tickets, tags, labels and other converted products. 2010 AVY SEC Filed Annual Report
The second quarter earnings report was downbeat. Presentation dated July 26, 2011 AVY reported an E.P.S. of 69 cents, down from 78 cents in the 2010 second quarter. Revenues declined 2% before the benefit of currency translation.
The current forecast for 2011 at that time was $2.45 to $2.75 per share on an adjusted basis. The current consensus estimate is for $2.52 in 2011 and $2.95 in 2012. At a total cost of $25.71, the P/E on that forward estimate is around 9.35. The dividend yield is about 3.89% at the current $1 per share annual rate: Press Release
Morningstar currently rates this stock five stars. S & P is more subdued with a current rating of 3. I would go with Morningstar on a valuation basis and with S & P when focusing on near term earnings.
Avery Denison website: Avery Dennison Corporation Some basic financial information can be found at Avery Dennison Fundamentals Snapshot.
I would classify AVY as a cyclical company, but not as cyclical as a steel or copper firm.
Avery Dennison closed Monday at $27.24 up 84 cents for the day.
5. Sold 101+ BRKL at $8.23 (see Disclaimer): This bank postponed the release of its earning report to give it more time to look at "certain booked entries that were made to correct differences between the Company's underlying loan systems and the general ledger". www.sec.gov I did not see any reason to stay around for the end result of that analysis. I took a small loss on this transaction. I may buy the shares back when and if the company gives itself a clean bill of health.
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| 2009 Taxable Account AVY 50 Shares Realized Gain +$457.46 |
Avery has a leading market share in pressure sensitive materials and a variety of tickets, tags, labels and other converted products. 2010 AVY SEC Filed Annual Report
The second quarter earnings report was downbeat. Presentation dated July 26, 2011 AVY reported an E.P.S. of 69 cents, down from 78 cents in the 2010 second quarter. Revenues declined 2% before the benefit of currency translation.
The current forecast for 2011 at that time was $2.45 to $2.75 per share on an adjusted basis. The current consensus estimate is for $2.52 in 2011 and $2.95 in 2012. At a total cost of $25.71, the P/E on that forward estimate is around 9.35. The dividend yield is about 3.89% at the current $1 per share annual rate: Press Release
Morningstar currently rates this stock five stars. S & P is more subdued with a current rating of 3. I would go with Morningstar on a valuation basis and with S & P when focusing on near term earnings.
Avery Denison website: Avery Dennison Corporation Some basic financial information can be found at Avery Dennison Fundamentals Snapshot.
I would classify AVY as a cyclical company, but not as cyclical as a steel or copper firm.
Avery Dennison closed Monday at $27.24 up 84 cents for the day.
5. Sold 101+ BRKL at $8.23 (see Disclaimer): This bank postponed the release of its earning report to give it more time to look at "certain booked entries that were made to correct differences between the Company's underlying loan systems and the general ledger". www.sec.gov I did not see any reason to stay around for the end result of that analysis. I took a small loss on this transaction. I may buy the shares back when and if the company gives itself a clean bill of health.
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