Tuesday, July 27, 2010

Pared PNW at 39.25/Bought 100 of the ETF DTN at 42.45/Added 50 HFBC at 9.26/2011 Dividend Tax Limbo/STL PBIB NWBI WSBC/Bought 50 UNB at 18

A resident of Bell, California wanted to know how much the small town's chief administrative officer and city counsel members were paid and was told by the city clerk that the administrator made $185,736 and the council members $8,076. Well, as you might suspect, those number were not entirely accurate. When benefits are added to the numbers, the administrative officer of this small town was making almost $800,000 per year with an estimated pension of $600,000 a year. The assistant city manager was making around $376,000. And the part time city council members, some of them were pulling in close to $100,000. LA Times

The Old Geezer worked too hard yesterday, and had to take a nap after the market closed. Maybe the OG will wake up in time to assume HT duties later today. The OG is more adventuresome than the super cautious LB, at least until the OG gets the shakes which happens with some frequency.

There was some shift yesterday morning out of bond funds and bonds into stocks. Since the OG needs a rest, and LB is already working 24/7, about five trades made on Monday will need to be discussed in the next post.

The S & P 500 did manage to close above its 200 day moving average yesterday. S&P 500 INDEX,RTH Index Chart

At some point yesterday afternoon, before dozing off, the OG realized that the Regional Bank Basket Strategy had become material, defined to mean by the OG as any strategy whose collapse would cause the OG to have a bad case of indigestion and a flare up of the nerve issue. "Steady, OG, Steady", the RB muttered.

1. 2011 Tax Rates-Still in Limbo: I last discussed this issue in a April post. Dividend Tax Rate in 2011? If Congress fails to act, a large number of tax cuts will expire at the end of this year, and a summary of the major ones can be found at The Tax Foundation. Two of those provisions are the 15% tax rate for long term capital gains and qualified dividends.

The Democrats may have hit on a politically appealing plan to extend the Bush tax cuts, set to expire at the end of this year, to about 95% of the population. The general idea is to dare the republicans to block an extension of those tax cuts for 95% of the taxpayers to defend tax cuts for the "wealthy", in the terminology of the NYT. There are a few kinks in the plan that are developing. Some of Senate Democrats want to extend the Bush tax cuts for everybody for at least a year due to still shaky economic recovery. One of those senator, Evan Bayh of Indiana, is retiring at the end of his current term. Another Democrat senator voicing the same concerns, Ben Nelson of Nebraska, has voted just recently with the republicans on one of their now routine filibusters in the Senate. Obama is against extending the Bush tax cuts for the "wealthy", generally defined by the Democrats as a couple earning over $250,000 per year or an individual making more than $200,000. Those individuals are mostly part of the republican constituency and are generally not supportive of the Democrats' plans to redistribute money earned by them to the Democrat constituency. Obama's positions are described in the "multimedia" pop up, which has to be clicked at page two of the aforementioned NYT article.

On the issue of qualified dividends, which are now subject to a top tax rate of 15%, Obama would extend that rate for those deemed not "wealthy" by the Democrats, and would raise the rate to 20% for couples making over $250,000 and singles over $200,000. Everyone would pay 20% on capital gains, up from the current 15%. Those considered well off would also have their marginal tax rates revert back to pre-Bush tax cut levels of 36% and 39.6%.

2. Porter Bancorp (own-Regional Bank Stocks basket strategy): For the second time, Porter released an awful earnings report after the market closed on Friday. I sold my initial stake at 14.7 after Porter released its 2009 4th quarter report. In that earlier report, released on a Friday, the bank reported a 3 cent loss, compared to the consensus profit of 44 cents, based on increasing NPLs by 58.6 million in the quarter to 84.9 million. Item # 6 PBIB My initial reaction was probably the right one. Instead of just staying away, I was encouraged by the 1st quarter report and the bank's continuation of a 20 cent per quarter dividend. I therefore bought the 50 share position back at $14.1o and later rounded the lot to 100 shares with a purchase at 13.27 after noting some encouraging remarks by the CEO about loan losses.

As I said Porter did it again. Late Friday, Porter Bancorp reported a net loss of 15 cents per share due to substantial increases in the provision for loan losses. NPLs as a percentage of total loans is 3.64%. NPAs to total assets is a way too high 6.66%. The allowance for loan losses to total NPLs is 55.11%, suggesting the possibility of further surprises down the road. After a recent capital raise (Form 8-K), and the continued presence of TARP money on the balance sheet, the capital ratios are okay.

Porter's CEO, Maria L. Bouvette, claims that the bank's core operations remained solid during the quarter. Net interest margin increased 58 basis points year-over-year to 3.71%. Ms. Bouvette and Charles Porter control about 54.5% of the common stock. PBIB: Major Holders for Porter Bancorp, Inc Porter's life history is summarized in this article in Business First of Louisville. I decided to keep PBIB for the time being, though I may sell 50 of the 100 shares at some point.

The market must have anticipated the dismal report since the stock rose 9 cents in trading yesterday.

Another small bank, based in Louisville, does not appear infected with the same infestation of problems, Republic Bancorp (RBCAA).

3. HFBC: HopFed Bancorp, Inc.- Added 50 at $9.26 (owned-Regional Bank Stocks basket strategy)(see Disclaimer): HopeFed is a small bank headquartered in Hopkinsville, Kentucky. The one analyst following this bank estimated earnings for the 2nd quarter of 2010 at 35 cents per share. HopFed Bancorp reported net income for the 2nd quarter of 1.814 million or 46 cents per share. This bank recently completed a share offering at $9 per share raising 28.2 million in net proceeds. It injected 10 million of those funds into Heritage Bank, HFBC's wholly owned thrift subsidiary, to raise its capital ratios. NPLs as a percent of total loans was 1.83% of total loans. On a consolidated basis, the total risk based capital ratio increased to 18.03% on 6/30 from 13.75% on 12/31/2009. The bank is paying a quarterly dividend at a current rate of 12 cents, which results in a dividend yield of over 5%. Tangible book value is $13.6 per share.

HopeFed did receive 18.4 million in TARP funds. (page 3 Form 10-K) The last earnings report did not contain a balance sheet. I believe this amount is still outstanding and was shown on the balance sheet contained in the 1st quarter 10-Q filed with the SEC. After injecting 10 million into its bank subsidiary, HFBC would have had 18.2 million in net proceeds from the stock offering.

The bank owns the real estate for all of its branch locations except for one (page 31 Form 10-K)

I thought that the report was good enough to round up my lot to 100 shares by buying 50 yesterday at $9.26. I now have two satellite brokerage accounts, one that use to be a savings account and another that was primarily a money market mutual fund account with some bond and conservative stock funds. In both of those accounts, whose primary objective is capital preservation, I have opened cash stock brokerage accounts and have purchased stocks with relatively high yielding dividends. One account now has close to 25 names in it and I added HopFed to another which now has 6 individual stocks in the account. For both of those accounts, I view almost all of the individual stock selections as disposable when and if short term rates rise to an acceptable level. Currently, the savings account rate is a tad above 1% and the low cost money fund is hugging zero per cent. This is a modest shift away from my cash allocation, which was near 30% since 2007 until recently. The shift is due entirely to the Federal Reserve's two year Jihad against savers that is expected to last almost another year.

4. Sterling Bancorp (STL)(own common: Regional Bank Stocks basket strategy; also own TP STLPRA): Sterling Bancorp, based in NYC, reported net income of 2.3 million or 9 cents per share, one cent better than the consensus estimate. Allowance for loan losses to non-accrual loans was 109.76%. NPAs to total assets was .85%.

STL rose 7.64% or 73 cents to close at $10.28 on Monday.

5. Pared PNW at $39.22 Monday (see Disclaimer): I sold my highest cost PNW shares using FIFO accounting at $39.22. I am keeping my lower cost shares bought in two separate lots with the last purchase made at $31.9 last October. Pinnacle West Capital is an electric utility serving Arizona. It is not a core electric utility holding and is owned primarily for the dividend. I will therefore trade it to capture small share profits and to lower my overall average cost in the shares. The proceeds were used to buy the ETF DTN which gives me a broader exposure to dividend paying large cap stocks.

6. Bought 100 of the ETF DTN at $42.45 Monday (Large Cap Valuation Strategy)(see Disclaimer): This ETF is consistent with the large cap valuation strategy and secondarily to the dividend growth strategy. It is consistent with the dividend growth strategy particularly in its exclusion of large cap financial stocks altogether, who were notorious for cutting their dividends during the Near Depression period which will disqualify them from my dividend growth strategy most likely for the remainder of my life. { Item #3 Large Cap Valuation Strategy-A New Long Term Strategy and in Item # 1 Large Cap Valuations; Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds}

DTN is the WisdomTree Dividend ex-Financials Fund. The dividend yield is close to 4%. WisdomTree Dividend Top 100 Fund, DTN Fund Quote This ETF does not include any financials. Dividends are paid quarterly. The expense ratio is .38%. The heavist weight sector is utilities at 16.66% followed by consumer staples at 15.65% and industrials at 10.81%. This ETF attempts to track the Wisdomtree Dividend ex-financials index which measures the performance of "high dividend-yielding" U.S. stocks outside the financial sector. About 72% of the index is large cap stocks with market caps greater than 10 billion with the remainder in mid caps with market caps between 2 billion to 10 billion. WisdomTree Dividend ex-Financials Index

7. Northwest Bancshares (NWBI)(own-regional bank strategy): Northwest Bancshares reported a net income of 16.1 million for the 2nd quarter or 15 cents per share. The consensus estimate from 4 analysts was 13 cents. NPAs as a percentage of total assets was 1.87%. Allowance for loan losses to NPLs was 57.87%. Net interest margin was 3.47%. Compared to the other banks, the reaction of NWBI's stock to its earnings report was far more subdued, with the stock rising 22 cents or 1.86% to close at $12.02.

8. CNB Financial (CCNE)(own-Regional Bank Stocks basket strategy): CNB Financial reported net income of 3.1 million or 34 cents per share, up 25.6% from the 2nd quarter of 2009. The estimate from 3 analysts was 23 cents per share. Net interest margin was 3.67%. The capital ratios are good. NPAs to total assets was 1.77%. This is a decrease from 2.11% as of 3/31/2010. This bank was a recent acquisition. Bought 50 CCNE at 11.06

CCNE rose 7.03% or 78 cents to close Monday at $11.88.

9. Bought 50 Union Bankshares (UNB)(category 2-regional bank basket strategy)(see Disclaimer): This is a very thinly traded stock. I placed a limit order to buy 50 shares at the asking price of $18. Union Bankshares Inc (UNB) is a small bank operating in northern Vermont and northeastern New Hampshire. The bank opened two new branches in St. Albans and Danville, Vermont in July and October 2008 respectively. St. Albans is north of Burlington, near the border with Canada. Danville appears to be in a rural area. danville vt - Google Maps I counted 14 branches at the bank's web site: Welcome to Union Bank, Vermont's community bank. Only one of those is in NH, a town called Littleton.

UNB pays a good dividend, as many of these small banks do, and the yield is around 5.55% at a total cost of $18. Union Bankshares Inc, UNB Stock Quote The rate is 25 cents per quarter. It goes ex on 7/28, but that is not important.

The bank does not provide much in the way of details in its press releases announcing quarterly results. The SEC filed press release for the 2nd quarter reported net income of 1.53 million or 34 cents per share, up from 28 in the linked quarter from 2009. I will have to wait for the 10-Q to look at more details. The last SEC filed 10-Q for the March quarter showed good capital ratios. As of 3/31/2010, the total capital to risk weighted assets ratio was 15.3; the tier 1 capital to average assets was 9.9% (see page 44); the Net interest margin was 4.41% and the NPAs to total assets was 1.12%. In short a conservatively run small bank.

I do not expect much from this particular buy. The stock is not down much from the 2006-07 trading range of mostly in the $20 to $24 range: Union Bankshares, Inc. Share Price Chart | UNB If I collect a few years of dividends and then sell for $22, I would be pleased.

The Morningstar data does show a small dividend cut in 2009 from a $1.12 annual rate per share. The current rate is $1 annually per share. The dividend was increased in every year from 2001 to 2007, moving from 71 cents to $1.12 in 2007.

10. Wesbanco (WSBC) (own- Regional Bank Stocks basket strategy): WSBC reported after the close yesterday. The consensus estimate from 7 analysts was 28 cents. WesBanco reported earnings of 31 cents, up from 18 cents in the 2nd quarter of 2009. As of 6/30/2010, net interest margin was 3.56%; tangible book value was $11.95 per share; book value was $22.74 per share; NPLs to total loans was 2.78%; and the allowance for loan losses as a percentage of NPLs was .69. The stock rose 47 cents or 2.93% before the report's release in trading yesterday.

The regional bank basket has too many names in it for me to capture all of them with a snapshot, as I have been doing periodically. The current unrealized appreciation is close to $4,070, down from over 6 thousand at the end of April. There is close to a 2 thousand dollar realized gain so far, mostly in a few names such as EWBC. There was a $706 increase in the basket yesterday. LB hopes that the OG and the RB are near the end of adding names to this basket because LB is sick and tired of looking at these earnings reports.

11. Dividends and Interest: On Wednesday, 7/28, the following securities go ex dividend or interest. The TC with a XEROX TP, KTX, goes ex interest for its semi-annual payment. Added 50 KTX at 25 Union Bankshares goes ex for its quarterly dividend payment. GJN, a synthetic floater, goes ex interest for its monthly payment. BUY 50 GJN AT $12. The Prudential CPI floater, PFK, goes ex interest for its monthly payment. Both the junior and senior exchange traded bonds, DFP and DFY, go ex interest for their quarterly interest payments. Brookfield Asset Management (BAM) goes ex dividend for its quarterly dividend. Santander (STD) goes ex for its quarterly dividend.

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