Friday, July 23, 2010

Bought 40 CUZPRB in Regular IRA at 22.25/FNFG HBAN T BMY VLY NRIM/Sold 50 REPRB at 21.9/Bought 40 SBIB

LB, now firmly in control of the trading desk, continues to play small ball. RB hastened to correct the Deep Thinker, saying a more appropriate description would be a toddler version of Tee Ball and then added for good measure, "it is time for the real man and not a scaredy cat Mama's Boy. The LB was an Old Geezer before reaching its 16th birthday."

Maybe there is a disconnect of some sort between the corporate reports, particularly from industrial companies like MMM and the woe is me, dour sourish blah of your typical practitioner of the dismal science, sometimes referred to here at HQ as secular theology with a lot of numbers.

Sharron Angle, the GOP senate candidate in Nevada, refers to her followers as True Believers, and she means it as a complement. I use the phrase differently, hardly in a complimentary fashion. While I did not think that it was humanly possible, this Tea Party candidate makes Harry Reid look good. Sharron beat the chicken lady Sue Lowden for the GOP nomination and her unusual views are a hit among the legions of true believers in the U.S. {NYT (discussion of some of her beliefs) & YouTube - Sharron Angle: Spa TV Ad (ad by Sue Lowden on Sharron's proposal to give massages to prison inmates in some form of Scientology ritual which is admittedly beyond even the RB's comprehension)}.

After Uncle Ben's testimony this week, the Fed Funds futures market extended the period of no hike in the federal funds rate until August 2011. DailyFX

1. Bristol-Myers (BMY)(owned): Bristol-Myers Squibb reported an E.P.S. of 54 cents, excluding items, one cent better than the consensus forecast and reaffirmed 2010 guidance at $2.10 to $2.20. The consensus estimate is currently at $2.15. BMY reported revenues of 4.77 billion, missing the consensus forecast of 4.86 billion. The recently enacted healthcare bill cost BMY 2 cents in the quarter. The most vexing issue with BMY is the looming patent expiration for Plavix which provided 1.627 billion in sales for the quarter, up 6% from the 2nd quarter of 2009. Another problem is that the new drug, Onglyza, is performing well below expectations, generating just 28 million in sales during the quarter. Some of the bright spots discussed in the release are clinical trial results of new drugs and existing one. Two of the new drugs mentioned are apixaban for atrial filbrillation and ipilimumab for metastatic melanoma, both previously discussed in prior posts.

2. Valley National (VLY) (owned-regional bank strategy): Valley National Bancorp reported net income for the 2nd quarter of 33 million or 21 cents, up from 6 cents in the linked quarter. The consensus estimate was 18 cents. Net interest margin was 3.72%. Tangible common equity to tangible assets was 6.78%. The tier 1 leverage ratio was 8.16%. Total non-accrual loans as a percentage of total loans was 1.1%. Allowance for loan losses as a percentage of non-performing loans was good at 106.89. LB is pleased with this report. This bank pays a 5% stock dividend in addition to a cash dividend, so I now own 105 shares in the regional bank basket strategy which has 40 banks in it.

3. AT & T (owned): AT&T reported net income of 4.02 billion or 68 cents per share. Excluding a gain, earnings were 61 cents, handily beating the consensus estimate of 57 cents. There were 3.2 million activations of IPhones in the quarter, and 1.6 million organic adds in total wireless service. The churn level was the lowest ever, with a 1.01% churn in postpaid subscribers (i.e. those signing long term contracts). There was a 32% increase in wireline interest service and a 209,000 net gain in AT & T's TV subscribers with 2.5 million in service. Net new contract customers were 496,000, down from 512,000 in the prior quarter. Overall revenues rose only .6% to $30.81 billion. The tone of its future forecast changed from stable-to-improved earnings per share to strong earnings growth. The results did produce a measure of enthusiasm as the shares gained 59 cents to close yesterday at $25.51.

I have been buying AT & T at below $25, with all of the shares acquired in the $24.45 to $25.45 range and I am reinvesting the generous dividend. I own about 200 shares as part of the dividend growth strategy and the large cap valuation strategy. Item # 10 Added To AT & T at 24.75; Bought 50 AT & T at 24.45; Bought 50 AT & T at 24.45; Bought More AT & T) Except for the dividend, I have a minimal total return. On the bright side, I avoided a loss by selling all of my then existing common shares at over 38 on 2/4/08 (AT & T) and re-established a position at around a $24.75 average cost.

The dividend growth strategy and its criteria are explained in several prior posts including Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds (primary) and in Item # 1: Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009.

The large cap valuation strategy is outlined in Item # 3 Large Cap Valuation Strategy-A New Long Term Strategy and in Item # 1 Large Cap Valuations.

4. Northrim BanCorp (NRIM)(owned-Regional Bank Stocks basket strategy): Northrim BanCorp increased net income by 14% to 2.1 million or 33 cents per share, up from 29 cents in the both the 1st quarter of 2010 and the 2nd quarter of 2009. The consensus estimate by two analysts was for 28 cents. Northrim did not participate in TARP. Its Tier 1 capital to risk adjusted asset ratio was 14.77% as of 6/30, up from 13.5% a year ago. Tangible book value was 16.46 per share. Nonperforming assets declined from 3.2% of total assets at the end of the 1st quarter to 2.82% as of 6/30. Net interest margin was 5.06%, among the highest in my regional bank basket. The tangible common equity to tangible assets ratio is among the highest too at 10.53%. The current dividend is 40 cent per year. While I expressed some reservation about buying more than 50 shares of NRIM, I may change my mind based on this report and the bank's capital position.

5. Huntington Bank (HBAN): (own-(Regional Bank Stocks Basket Strategy): Huntington is one of the banks placed in Category 1 of the Regional Bank Stocks basket strategy, which automatically places a limit of $300 on any share purchase. That limit was slightly exceeded with HBAN, possibly in recognition that HBAN was not as bad as some of the others in that category. The risk is viewed as greater for those banks placed in category 1, but some of my largest percentage gains have come from banks viewed as having the most risk. One of those, EWBC, produced a huge percentage gain. Buy of 50 EWBC at $5.7 SOLD 50 EWBC at $19.04 Another, WBS, is up close to 300%. Buy of 50 WBS at $4.58 This illustrates a couple of points about the regional bank strategy. I may be proven wrong about my initial assessment of the bank's risk, which is probably true for both EWBC and WBS, and that I will be frequently surprised by the actual results of many purchases.

I purchased my small, 90 share position in Huntington in two lots. Added 40 of HBAN at $3.7 Bought 50 Huntington Bank at $4.27

Huntington Bancshares reported net income of 48.8 million or 3 cents per share. While this does not sound like much, it is an improvement over the 40 cent loss reported in the 2nd quarter of 2009.

There was a 17% decline in non-performing assets to 1.582 billion. The level of non-performing assets is one reason for HBAN's category 1 classification. Total NPAs to total loans is still at 4.24%. Other reasons include the 4 cent annual dividend, reduced from $1.06 in 2007, and the continued presence of government TARP money as part of HBAN's equity. The tangible common equity to tangible assets ratio was 6.12%. "On an absolute basis, our Tier 1 and Total risk-based capital ratios at June 30, 2010, exceeded the regulatory "well capitalized" thresholds by $2.8 billion and $2.0 billion, respectively"

On the brighter side, besides a return to profitability, the allowance for loan losses as a percentage of NPLs rose from 87 as of 3/31/2010 to 120 in the June quarter, a comforting figure at least to me.

Still, what exactly generated the profit at HBAN? As noted in an article in WSJ, Huntington cut its loan loss provision in the quarter by 53%.

6. Bought 40 CUZPRB at 22.25 in Regular IRA (See Disclaimer): CUZPRB is a cumulative equity preferred stock issued by the REIT Cousins Properties (CUZ). I prefer to own REIT preferred stocks in a retirement account, usually in very small amounts given their risks, for a number of reasons. Given their tax status, the REITs do not pay qualified dividends and their distributions frequently have many classifications which add to LB's many burdens at tax time. And, if a REIT defers a dividend payment, this has tax consequences for a U.S. taxpayer that are explained in the every REIT's prospectus for preferred stock issues (i.e. recognition as income the accrued yet unpaid dividend). Another reason is that these issues, due to their risks characteristics, can be volatile. By placing CUZPRB in a regular IRA, I can receive some benefit in the event of a sudden, large downdraft in the price by including it in a Roth conversion. The benefits of such a technique helped me move most of the funds out of a regular IRA during the Near Depression period between October 2008 to March 2009 while minimizing the tax consequences.

I only bought 40 shares due to the risks which are generally discussed in my Gateway Post for REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages. I do not believe CUZPRB is rated. If I was rating it, it would definitely be classified somewhere in the junk rating category. Another reason for buying only 40 is that I have psyhcological issues about mucking up previously successful trades in the same security. I was successful during the Near Depression period trading in and out of CUZPRA and CUZPRB (e.g. SOLD 50 CUZPRB IN REGULAR IRA at $15.7 purchased at $12.18)

As with other REIT preferred stocks that I own, CUZPRB has a $25 par value, no maturity date, and a low priority just above common stock. Unlike many other equity preferred stocks, REIT preferred shares pay cumulative dividends, but generally do not pay interest on deferred distributions which is the case on TPs. The coupon is 7.50%. This gives me about a 8.43% yield at a total cost of $22.50.

This is a link to the prospectus: COUSINS PROPERTIES, INC..

I view CUZPRA and CUZPRB to be functionally equivalent. The only reason for buying one rather than the other is current yield at the time that I decide to make a buy. The "B" shares, with a .25% lower coupon, provided the higher yield yesterday at the prices available.

These preferred stocks are scheduled to go ex dividend on 7/29: Cousins Properties Inc, CUZPRB SEC Filed Press Release Declaring Common and Preferred Dividends

I am already familiar with this REIT. A purchaser of a REIT preferred stock has to keep in mind one salient point at all time. You only have the dividend. The first item to check is whether or not the REIT is paying a common stock dividend. Cousins is paying a small one which has been slashed. From the perspective of the preferred shareholder, any cash dividend paid to the common shareholders is sufficient to trigger the stopper provision so I do not care if CUZ reduces that common dividend to a penny a year. The reduction in that dividend provides more capital for the preferred shareholders. However, the reduction of the common dividend does signal financial weakness which was not uncommon among REITs during the recession.

{CUZPRB is basically a substitute for FRPRK which was sold due to risk considerations and to harvest a 100+% profit plus several quarterly dividends. Sold FRPRK at 17.01 Bought FRPRK at 8.4 The First Industrial preferred stock was bought and sold several times during the Near Depression period. Unlike Cousins, First Industrial has eliminated the common stock dividend which places the preferred shareholder at an enhanced legal and practical risk of a deferral. The practical risk is that the REIT has to be in some difficulty to eliminate the common dividend, and may be having trouble securing financing and/or bumping up against prohibitions in senior loan covenants about payments on junior securities. FR has said in several recent earnings releases that it was close to activating those covenants, and the last straw was a Fitch downgrade of FR preferred stocks to CCC, deep into junk, based in part on that consideration, which is understandable. I therefore decided not to risk my gain and sold my shares with the plan to substitute another REIT preferred stock. I have other REIT preferred stocks in the retirement accounts, primarily for their yield, that were bought during the DARK PERIOD, including SLGPRC with over a average yield of over 16% at my purchase prices of $10.5 and $11.89 and close to 30% from a purchase of LXPPRD at $7. I am more comfortable with the 80 shares of SLGPRC than I am with the 50 shares of CUZPRB and LXPPRD.}

Cousins has taken some steps to improve its finances. Some of these activities are described in this SEC filed presentation at a conference in early June 2010. Another type of activity is selling some real estate such as the recent 85 million dollar sale of the San Jose MarketCenter.

7. FNFG (own-(Regional Bank Stocks Basket Strategy) regional bank basket strategy): Excluding one time charges relating to its recent acquisition of Harleysville National, First Niagara reported in line earnings of 44.9 million or 22 cents per share. On a consolidated basis, the tangible equity to tangible assets ratio was 8.62%. Net interest margin was 3.65%. The TEXAS RATIO is a very good 7.43% {" (5) The Texas ratio is computed by dividing the sum of nonperforming assets and loans 90 days past due still accruing by the sum of tangible equity and the allowance for credit losses. This is a non-GAAP financial measure that we believe provides investors with information that is useful in understanding our financial performance and position."} The efficiency ratio is a tad high in my judgment at 78.2% in FNFG's banking segment. Total non-performing loans to total loans is good at .74%, indicating to me conservative lending practices. The allowance for loan losses as a percentage of NPLs is a comforting 121.6%. Those last two ratios need to be compared to the ones at Hudson City discussed in Thursday's post and ignored by the Lame Brain when making an unauthorized purchase of 50 shares of HCBK. Items ## 2 & 5 HCBK.

FNFG is one of the regional banks where I had an unrealized profit and now I don't. I am close to break-even.

8. Bought 40 SBIB at $4.63 (Category 1 addition-(Regional Bank Stocks Basket Strategy & LOTTERY TICKET Strategy) (See Disclaimer): LB decided to add just 40 shares of SBIB in a BABY STEPS maneuver after SBIB reported an unexpected profit in the 2nd quarter. As previously explained, LB uses a variety of criteria to rank regional banks in a monitor list. Item # 4 Ranking Criteria for Regional Bank Stocks

SBIB was near the bottom before the last earnings report and moved up enough notches to permit a small purchase of shares as a LOTTERY TICKET, which limits the potential purchase to $300 or less with several exceptions as one would expect for one of LB's rules. "Stinking rules", RB just said, in yet another rude interruption in the LB's thought process.

The earnings report from SBIB gave me a tad more confidence in the TP SBIBN bought at 23.2. (see generally Trust Preferred Securities: Links in One Post; Regular Preferred and Trust Preferred)

Sterling Bancshares reported a 1 cent per share profit. SEC Filed Press Release The consensus estimate was for a five cent loss. As of 6/30/2010, NPAs were still elevated at 3.63% of total loans. The net interest margin was 3.74%. The capital ratios are good. Tangible equity to tangible assets was 9.01% and the total capital to risk weighted assets was 17.04%. Sterling has paid back TARP. Houston Business Journal (agreement involved 125.198 million dollars- Form 8-K) This "Sterling" is a Texas based bank with 57 branches.

Another factor that restrains any significant purchases is that the bank has issued a large amount of shares at depressed prices to maintain its equity capital. The most recent sale was 20 million shares last March at $4.60 (net of $4.347 to SBIB): Form 8-K I would view this offering as dilutive to existing shareholders. It did raise 86.8 million for the bank and hopefully no further capital raises will be desired or needed by the bank. Another capital raise occurred in April 2009 with the sale of 8.28 million shares at $7 raising net proceeds of 54.8 million dollars. Press Release Form 8-K

9. Sold 50 of 100 REPRB at 21.9 (see Disclaimer): I bought my 100 share position of this TP from Everest Re in two 50 share lots. The highest cost lot was purchased at 20.78 and one quarterly interest payment has been received for those shares. I sold those shares yesterday at $21.90. When I bought the second 50 share lot at 20.19 shortly after the first lot purchase, I mentioned then that the higher cost lot would be sold with the lower cost shares kept. Then, if the price fell to below $19, I would buy back the shares sold and then wait for an opportunity to sell the shares bought at $20.19, and so on. That is one method for managing interest rate risk for long term bonds. The underlying bond in this TP and the TP matures on 3/29/2034: Final Prospectus Supplement

LB refuses to discuss any more of the trades or the relevant and material news. Possibly some of the other trades from Thursday will be discussed in the next post. Maybe the Lame Brain will entertain the readers with some of its observations about the news. Oh, LB forgot, actually watching the news is not among the RB's activities since it does not solely involve the making of noise. Maybe the LB will go on strike for a couple of years. It is obvious that LB's skills are not appreciated here at HQ. Let the Lame Brain pick the stocks with one of its techniques, such as throwing into the air ten wads of paper, each containing a different stock symbol, and buying the one that hits the Old Geezer in his expanding middle section. Yes the RB bought Yahoo a few months ago because the Meathead likes blondes.

One of the trades which may be discussed, provided LB receives some much deserved recognition, is the re-purchase at 26.25 CAD of the Husky shares previously sold at 30.48 CAD. If LB had any feelings which fortunately is not the case, it would be feeling sorry for itself, woe is "it", and the Stock Stud would be hurt by the lack of recognition for its hard work, 24/7, WITHOUT PAY, for the Great Leader.

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