Wednesday, January 27, 2010

Bought 50 PBIB at 14.1/Bought 50 FSBK at 10.15/BRK/B AMAT EWBC PVSW WASH RF

In the last hour of trading yesterday, the financials started to lead the market down. The bid/ask spread narrowed during the decline on two lightly traded small regional banks that were on my buy list, so I went ahead and bought some shares.

Over the past two weeks or so, it is clear that institutions have been selling with regularity, particularly in stocks reporting better than expected earnings. Cramer highlighted this point in his show last night. Being naturally cautious anyway, I did not need Cramer to tell me what was happening, and this has kept me from adding to Intel and Applied Materials. Just get out of the way may be the best policy. The two small regional banks bought yesterday are not exactly on the nitwits radar screen. One has an average volume of around 17 thousand shares a day and the other is trading heavy at 10 thousand.

The U.S. deficit spending appears to be out of control and has been moving in that direction since the early years of the Reagan Presidency. The last financial crisis simply added to the momentum, bringing the ultimate day of reckoning a few years closer. The Senate refused to pass legislation yesterday that would have created a bipartisan task force to make recommendations on ways to reduce the deficit. Republicans voted against it out of fear that some tax increases might be included in the recommendations, while the Democrats were concerned about cuts in medicare and social security. It is easy to be irresponsible, just kick the can another year forward, and hope that you retire before the crap hits the fan or just blame the other party. Ultimately, nothing meaningful will be done until it is too late, and both parties will be responsible. Some Political Type Observations Some may say that is pessimistic. I would just say realistic based on years of observing dysfunctional behavior.

On the same day, the Congressional Budget Office released its estimate for the U.S. deficit for the current fiscal year, ending in September 2010, a staggering 1.3 trillion dollars with no changes in the laws. Congressional Budget Office - The Budget and Economic Outlook: Fiscal Years 2010 to 2020 By the end of 2010, the CBO projects that total debt will reach 60% of GDP, the highest level since 1952. The entire debt of the U.S. was less than 1 trillion when Reagan started his first term: United States public debt - Wikipedia,

Forbes has a timely article this week aptly titled "The Global Debt Bomb"

1. Corning (owned-2010 Speculative Strategy): Corning reported 4th quarter earnings of 44 cents, excluding items, two cents better than the consensus estimate. Revenues increased by 41.3% year-over-year to 1.53 billion, better than the 1.45 billion consensus estimate. Gross margin increased by 2% sequentially and 28% over the 4th quarter of 2008. Free cash flow for 2009 was 798 million, and Corning ended the year with 1.6 billion more in cash than debt. Corning expects the display glass market to be up in the first quarter, compared to its earlier forecast of lower seasonal demand. The telecommunications business is expected to fall 10% to 15%, however, based on lower private network and fiber demand in China.

2. Dupont (owned): DuPont reported 4th quarter earnings of 48 cents on a 10% increase in sales. Revenues in the Asia-Pacific region rose by 34%, returning to pre-recession levels. DuPont increased its full year guidance to $2.15 to $2.45. During the last quarter, raw material, energy and freight costs were about 20% adjusted for currency and volume. Sales in the U.S. were down 2%.

I bought DD during the meltdown at $16.68 on March 6, 2009: The Most Abused Word: Reform/Buys of IR & DD/Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an Ideology My intention is to keep the shares as long as DuPont does not cut its dividend. With a current yield of close to 10% at my cost, I view the common shares to have a bond like quality, except that I have no protection against a reduction or an elimination of the payout.

3. Zions (own ZBPRA, ZBPRB, ZBPRC): I noticed yesterday morning good gains in the two equity preferred stocks and the trust preferred, and I suspected that Zions had reported better than expected 4th quarter earnings. Zions Bancorporation reported a narrower than expected loss in the 4th quarter of $1.26. Analysts were expecting $1.64. It is interesting to me that the market responds extremely favorably to this narrower loss and then penalizes a company for reporting better than expected earnings. Maybe the market needs a psychoanalyst and a some heavy doses of prescription medications, possibly the kind that are given to patients who have loss touch with reality. Zions is confident that loan losses have peaked and will significantly decline in 2010. The bad loan provision did fall 31% sequentially in the 4th quarter. Zions tangible common equity ratio as of 12/30/09 was 6.5%.

4. Case Shiller Index: The conclusion that I draw from the small .2% decline in home prices for the 20 city index is simply that it will take a long time for housing prices to recover to 2006 levels. So far, at least the prices have recovered to 2003 levels. Fifteen of the twenty cities showed declines in November compared to October. The positive signs are in California cities, with L.A. up .8%, San Francisco +.06% and San Diego at .4%. This confirms my earlier prediction that California will start to recover from its plunge sooner than other areas in the country.

5. Northwest Bancshares (NWBI)(owned-Category 2 Regional Bank Strategy): After NWBI reported results yesterday, Janney Montgomery Scott upgraded the stock to buy from neutral with a $13 price target. The price target is meaningless to me since the essence of the regional bank strategy is to hold a basket of stocks in this sector for at least five and no more than 10 years. A price target for the next year therefore is irrelevant to me. Some of rationale for the upgrade is summarized in this note from the NWBI does have an abundance of capital with a recent stock sale raising close to 700 million (68.8 million shares at $10).

Northwest Bancshares reported earnings of just 1 cent for the 4th quarter however. Some journalists refer to its dividend declaration of 10 cents as a dividend cut. This would be incorrect and fails to take into account the shareholders of the mutual company received 2.25 shares for every 1 held at the time of Northwest's conversion to a 100% stock company from a partially-public mutual holding company. For those shareholders who were receiving 22 cents, the 10 cent rate would be in a slight annual increase. Part of the shortfall for the quarter was due to a charitable contribution made by the bank when it made the conversion from a mutual holding company. Book value per share is $11.9. Tangible common equity to assets was 14.53% as of 12/31/09.

6. Region's Financial (RF) (owned-Category 1 Regional Bank Strategy): There is nothing positive that can be said about Regions. In fact, RF does not belong in Category 1 of my Regional Bank Stocks' stratagem, but needs instead a category of its own, more like Category 1/4. Maybe it is just something in the water down in Alabama, which would explain a lot of things. I am certain that Senator Richard Shelby (R) has been imbibing heavy doses of the stuff since birth. I did live in Huntsville, Alabama for many years as a teenager, so I understand.

The CEO Dowd Ritter, the chief honcho who took Regions from $38 a share in 2006 to a low of $2.94 on 3/6/2009 (RF), expresses mild disappointment with the ugly 4th quarter results, saying he is not pleased. I wonder if anyone on the Board is aware of the report, possibly LB needs to send them an email enclosing the earnings releases for the past couple of years. It is not that I care, even though I own some shares, since my shares were bought just as an LT after the bank was just about demolished by its current management. Bought Lottery Ticket in 50 shares of RF at $3.47/ And, I have made a few bucks trading its TP with two round trips after collecting one quarterly dividend on each trip: /Sold RFPRZ at 23.46/

I would, however, be curious why any shareholder who bought their shares before 2008, still clinging to hope of a rebound, would vote to confirm any member of the current Board for another term. RB just asked the LB, the author of all of the minutes here at HQ, to take a chill pill.

In America, particularly in the financial industry, failure is rewarded, even when it is catastrophic failure that destroys the firm, threatens the fabric of the world's economic system, or destroys 20 years of value creation at a bank.

Regions reported a wider than expected loss of 51 cents for the 4th quarter. A loss of 1.3 billion was incurred for 2009.

7. Baby Berkshire (BRK-B)(own-2010 Speculative Category): It should not be a surprise to anyone that S & P decided to added the Baby Bs to the S & P 500 to replace Burlington Northern This would be contingent on Berkshire completing the acquisition of Burlington which I would expect to occur.

8. Applied Materials (owned): AMAT was upgraded by Oppenheimer yesterday to outperform MarketWatch I may add 50 shares on further weakness.

9. Bought 50 Porter Bancorp, Inc (PBIB) at $14.10 (See Disclaimer): Porter Bancorp is a holding company for PBI Bank, which operates in Kentucky, primarily in the Louisville metropolitan area. The bank has 19 branches. This bank will be place in Category 2 of the Regional Bank Stocks' stratagem.

Earnings per share increased to 46 cents in the third quarter of 2009, compared to 47 cents in the year ago quarter. Earnings for the first nine months of 2009 were $1.08 versus $1.34 from a comparable period in 2008. The consensus estimate for 2009 is currently $1.51, and $1.91 for 2010. PBIB: Analyst Estimates for Porter Bancorp, Inc.

The dividend yield at my cost is close to 5.6% at the current annual penny rate of 80 cents. PBIB Stock Quote The bank also paid a 5% stock dividend in November 2009./ ex991.htm The current quarterly dividend rate is 20 cents per share.

The following table shows the ratios of Tier 1 capital and total capital to risk-adjusted assets and the leverage ratios for Porter Bancorp, Inc. and PBI Bank at the dates indicated:

September 30, 2009December 31, 2008

Tier I capital


Total risk-based capital

Tier I leverage ratio

The allowance for loan losses to total loans at the end of 9/30/09 was 1.58%. The allowance for loan losses to non-performing loans was 83.6%.

The chart reveals that the stock recently fell below its 200 day moving average: Porter Bancorp, Inc. Share Price Chart | PBIB Before the recession, the stock was trading mostly in a channel between 18 to 22. The stock history goes back only to 2006 however.

Porter did participate in the TARP program with the sale of 35 million in preferred stock: a5838293.htm ex10-1.htm The last quarterly report for the Q/E 9/30/09 showed the preferred shares still listed under equity on the balance sheet.

Page 4 of this analyst presentation contains a map of it current service area: Presentation Materials for Third Quarter 2009

The consensus estimate is for a $1.91 in 2010. PBIB: Analyst Estimates for Porter Bancorp

10. Bought 50 shares of FSBK at 10.15 (see Disclaimer): First South Bancorp Inc was added primarily for geographic diversity and will be placed in Category 2 of the Regional Bank Stocks' strategem. At my cost, the dividend yield is close to 7.8%, and it went ex dividend earlier this month. Given the level of current earnings, it would not be surprising to see a dividend cut, but that depends on the overall confidence in the Board about the upcoming quarters. The bank is not currently earning enough to cover the 80 cent payout. The bank did earn 18 cents in the 3rd quarter of 2009 down from 21 cents in the 2008 3rd Q: / The bank also reported its 4th quarter results, earning 16 cents. First South Bancorp Net income for 2009 was 72 cents versus 80 cents paid out in dividends. The service territory of the bank is eastern North Carolina: About Us This is a map of its branch locations: Branch Locations As far as I can tell, no analysts follow the stock.

10. Pervasive Software (PVSW) (owed-LT Category): Pervasive Software reported earnings of 6 cents on a GAAP basis (7 cents non-GAAP) on a 4% increase in revenue. PVSW realized 2.2 million in positive cash flow, ended the quarter with 41.7 million in cash (market cap is less than 91 million), and bought back 200,000 shares during the quarter at an average weighted cost of $4.97.

11. East West (owned-Category 2 Regional Bank Strategy): East West Bancorp reported net income per diluted share of $1.96. Those earnings resulted from a pre-tax gain of 471 million resulting from the FDIC assisted acqusition of of United Commercial Bank, offset by a 140 million dollar provision for loan losses and a 45.8 million dollar impairment on investment securities. EWBC forecasts earnings of 4 to 8 cents for the 1st quarter of 2010.

All of the capital ratios are as of 12/31/2009. TIER 1 leverage capital ratio was 11.7%. Well capitalized is 5%. TIER 1 risk based capital ratio was 17.9%. Well capitalized is 6%.Total risk based capital ratio was 19.9%. Well capitalized is 10%. Book value was $14.37 per share up from 12.58 as the end of Q/E 9/09.

12. WASHINGTON TRUST (WASH)(owned Category 2-Regional Bank Strategy): Washington Trust reported earnings of 30 cents per share for the 4th quarter, an improvement over the 27 cents earned in the year ago quarter. Tier 1 risk based capital ratio was 11.14%, and total risk based capital ratio was 12.4%. Both ratios were slight improvement over the numbers for the 3rd quarter. The consensus analyst estimate was for 30 cents. WASH: Analyst Estimates for Washington Trust Bancorp

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