Saturday, July 24, 2010

Sold TP CPP at 24.9/Bought 100 HSE:TO at 26.25 CAD/EXC MSFT BKMU GBCI FIBK SBSI OCFC SIVB/Bought 50 BOCH at 4.46

In an article at Morningstar, Bill Miller argues that, relative to bonds, large cap stocks are at their cheapest levels since 1951. (see discussion of that article in International Business Times) I would generally agree that U.S. large caps are relatively cheap compared to mid and small cap, and stocks as an asset class look better to me than new purchases of bonds. I discuss my large cap valuation strategy in several posts, including Item # 3 Large Cap Valuation Strategy-A New Long Term Strategy and in Item # 1 Large Cap Valuations. Another way that I have played that theme is to buy the ETF OEF, which is the ETF for the S & P 100, the largest companies in the S & P 500. This necessitated selling some other stock ETFs that had a broader focus. Bought 100 OEF at 49.61 & Sold 102 VV at 49.43 Sold 101 VTI at 55.21 and Added 100 OEF at 49.11 Both VTI and VV were sold at a good percentage, long term profit, and I am around break-even on the OEF after Friday's rise. VTI covers the total stock market and VV has 750 large cap names. Since I believe the best valuations were in the S & P 100, the largest of the large, I made the transition to OEF from VV & VTI.

Atlantic Power, a Canadian company formerly listed for U.S. trading at the pink sheet exchange, is now listed at the NYSE under the symbol AT. AT: Summary for ATLANTIC POWER CORPORATION I own 200 shares traded on the Toronto exchange as a means to earn a return on my long term Canadian Dollar position. I view that holding to be a temporary placeholder investment. My goal is simply to collect some monthly dividends and then sell the shares for a profit, the amount is not that material. The shares did rally Friday in both Toronto and in the U.S., and the only news was the NYSE listing. (I believe AT used to be Alltel's symbol before it was acquired by Verizon)

"LB needs to work more than 24/7 to keep up, Snap to IT", Headknocker helpfully observed in passing. "LB is starting to fall behind on preparing the minutes of HQ's storied trading operation, and is excluding discussions of some trades and material news items on the unacceptable grounds of being tired", HK added for good measure.

General Electric (owned) raised its dividend by 20% and will resume its share buybacks which were suspended in September 2008. The raise is from 10 cents to 12 cents per quarter. It will be a long road before GE restores its dividend to 31 cents a quarter, where it was before being slashed to 10 cents.

With some bank seizures on Friday, the FDIC has closed 101 banks so far in 2010. As of 3/31/2010, the FDIC had 775 banks on its problem list, up from 702 at the end of 2009. One of the banks seized on Friday was Crescent Bank and Trust, based in Jasper, Georgia, that has over 1 billion in assets. Its failure is expected to cost the FDIC 242.2 million. One of the banks in my regional bank basket, Renasant Corporation, agreed to acquire Crescent's deposits and assets and entered into a loss sharing agreement with the FDIC. Renasant Corporation Announces the Acquisition of Crescent Bank and Trust and Completion of Capital Raise Renasant also sold in a private placement 3,925,000 million shares at $14 raising 54.95 million.

The S & P 500 has crossed above its 50 day moving average and is close to its 200 day line: S&P 500 INDEX,RTH Index Chart

1. SOLD 50 of the TP CPP at 24.9 on Thursday (See Disclaimer): Unlike the other TPs that I own, CPP pays interest semi-annually rather than quarterly. I just received the semi-annual interest payment for the shares recently bought at $24.2. CPP was a TP originating from Countrywide which is now part of Bank of America. While it has the same credit rating as the TPs originally issued by Delaware Trusts formed and owned by Bank of America, CPP has had a higher yield than those original BAC TPs. The sell of CPP is part of an overall management of interest rate risk for long term bonds. It also frees up capital to invest in other BAC securities when and if the occasion arises. I just sold another BAC TP (BACPRW at 23.55) to comply with the LB rule of having no more than $10,000 in securities from one company, a sum calculated based on aggregating the amount invested in all types of securities into one sum (i.e. common and equity preferred stock, junior bonds or TPs, senior bonds & principal protected notes or SIPs). This is a capital preservation rule which is designed to prevent a significant loss from either a Black Swan event related to a single company or a failure of the LB to properly assess all available information about a company which does happen from time to time.

2. Bought 100 HSE.TO at $26.25 CAD on Thursday (see Disclaimer): I previously purchased 100 shares of Husky at 28.99 and sold those shares at 30.48 CAD in order to buy shares in two Claymore Canadian ETFs including Claymore 1-5 Yr Laddered Government Bond ETF - CLF which I later took to a 400 share position. Husky Energy is viewed primarily as a value play with a good dividend yield. I believe that I stayed around long enough last time to collect one quarterly dividend payment. All positions in foreign securities are held in the taxable account, primarily due to the foreign tax credit issue relating to foreign withholding taxes for dividend distributions. Also, due to the added currency risk issues inherent in owning any foreign security, most of them are viewed as too risky for the retirement accounts when that risk is added to the normal ones.

{ Virtually all of my purchases of Canadian securities are viewed as a means to earn income on my long term position in Canadian dollars. I am a long term holder of the three Claymore Canadian ETFs which have been purchased this year. Husky is more of a trade, as is the 200 share position in Atlantic Power (ATP.TO) and my 210 share position in Enerplus (ERF-UN.TO). Another long term position is the Canadian company Brookfield Asset Management (BAM-A.TO), traded in the U.S. under the symbol BAM. My last purchase of BAM shares was during the Dark Period at around 13.}

I wanted to reference the recent dividend history at Husky. Husky Energy - Dividend Information The chart at that linked web page shows an increase in the quarterly dividend rate from 9 cents CAD in 2001 to 50 cents CAD in 2007. Along the way, when Husky experienced good earnings, the company would pay an additional dividend. Examples would include a $1 CAD dividend on 10/18/05; 54 CAD cents on 11/4/2004; and an extra 50 cents in 2007. These payments are explained by Husky as follows: "The Board of Directors declared a special dividend of $0.54 so that shareholders can benefit from high commodity prices and Husky's strong balance sheet and financial resources." With the onset of the recession and the decline in energy prices, the Board cut the quarterly dividend to 30 CAD cents from 50 CAD cents. I like what the Board does with the dividend. It suggests that the Board will raise the dividend once energy prices rise and/or Husky's profits improve, and the shareholders will receive added compensation during years of good fortune. Even without a dividend raise or a special dividend, the current run rate of $1.2 CAD annually gives me a 4.57% yield at a total cost of $26.25 CAD (7.2% at the 2006 $2 CAD rate). I would not expect a dividend raise this year.

This is a PDF link to the 1st quarter earnings report for Husky Energy. The firm reported net earnings of 345 million or 41 cents per share.

3. Microsoft (owned): Microsoft reported 51 cents per share in diluted earnings, and net income for the 2nd quarter of 4.52 billion dollars (up 48%). The consensus estimate was for 46 cents per share in earnings. Revenues increased by 22% to 16.04 billion versus the estimate of 15.27 billion.

4. Bank Mutual (BKMU) (owned- Regional Bank Stocks basket strategy): Bank Mutual Corporation reported earnings of just 2 cents for the quarter. This is actually better than the consensus estimate of zero. Due to this kind of earning's issue, BKMU was placed in Category 1 of the regional bank basket strategy, which limits the investment to no more than $300 with exceptions. Bought 50 BKMU at 5.51 One of the exceptions is that I will add the profit from any prior purchase to that $300, as well as all dividends previously received, neither of which was applicable to BKMU which has never been owned prior to the aforementioned 50 share purchase.

Another reason for a category 1 classification is the allowance for loan losses as a percentage of NPLs. BKMU is at 38.58%. Another problem is the high NPLs to total loans of 4.07%. The efficiency ratio is way too high at 98.03% which suggests a need for some expense cutting. This is one number where an investor wants a low number, preferably below 50%. Another negative is the net interest margin at a very low and totally unacceptable 1.54%. This bank needs to be shaken up in a big way.

One reason for purchasing any shares is the strong capital position. As of 6/30/2010, this bank had a total risk based capital of 22% (10% is well capitalized) and a tier 1 capital ratio of 10.1%. While the bank is not even close to earnings its dividend payout, the yield at my cost is currently close to 5%. If I was on the Board, I would eliminate it and shake things up with expense reductions. This article from TheStreet mentions BKMU as a potential takeover option which is probably the best option for shareholders at this point given the negative numbers, some of which are mentioned above.

5. Glacier Bancorp (GBCI) (owned- Regional Bank Stocks basket strategy): Glacier Bancorp reported net income of 13.2 million or 19 cents per share, up from 17 cents in the 2nd quarter of 2009. The estimate was for an E.P.S. of 14 cents. The non-performing assets as a percentage of total assets remains at an elevated level of 4.01%, though down from 4.19% as of 3/31/2010. The allowance for losses as a percentage of NPAs is at 55%. Tangible book value was at $9.56. Net interest margin was 4.35%. GBCI rose $1.26 or 8.41% Friday to close at $16.24. Bought 50 GBCI at 13

6. First Interstate BancSystem (FIBK) (owned- Regional Bank Stocks basket strategy): First Interstate BancSystem reported net income of 5.8 million or 14 cents, well shy of the 24 cent consensus estimate. This is the worst report to date from a bank in category 2 of my regional bank basket. I expect disappointments but this one was a surprise. If the bank was not part of my geographic diversification plan for this strategy, I would dump it now. If FIBK has done its IPO after this report, rather than earlier this year, the price would not have been $16, more like $13 in my opinion. The timing was certainly auspicious. LB blames the RB for buying First Interstate. When discussing this bank, LB pointed out some red flags that were ignored by the Old Goat and the Lame Brain, who were chanting in unison "Go With Cramer, Go With Cramer, Go With Cramer". It is a miracle that this operation is so successful with all of the burdens that the Stock Stud has to carry. The Old Geezer is a big load and the Lame Brain is a constant distraction from the orderly consideration of the million or so variables, contingencies, and alternate scenarios routinely crunched by LB.

Non-performing assets were 4.35% of total assets which is poor. The allowance for loan losses to total NPLs was 72.31%. Tangible book was $11.61 per share. The tangible common equity to tangible assets ratio was 7.06%.

FIBK fell 71 cents or 4.74% Friday to close at $14.26. I suspect that it has further to go on the downside.

7. Southside Bancshares (SBSI) (owned- Regional Bank Stocks basket strategy) Southside Bancshares reported net income of 9.3 million or 58 cents per share, down 2 cents from the linked quarter. The one analyst estimated 63 cents. Net interest margin was 3.09%. The NIM declined from the prior quarter "due primarily to the one time prepayment announcements by Fannie Mae and Freddie Mac which increased amortization expense for agency mortgage-backed securities. Interest rates fell sharply in the second quarter resulting in a reduction in slope in the fixed income market." NPAs to total assets was good at .66%. Allowance for loans losses to total NPAs was 97.77.

SBSI rose 30 cents Friday to close at $19.64. SBSI was a recent acquisition: Bought 50 Southside Banchshares at 19.49 (SBSI)

8. OceanFirst Financial Corp. (OCFC) (owned- Regional Bank Stocks basket strategy)) OceanFirst Financial reported earnings of 27 cents, up from 24 cents in the 2009 linked quarter. The estimate was for 25 cents, so OCFC beat the consensus estimate from 3 analysts by 2 cents. The high estimate was 26 cents. Net interest margin was 3.77%. NPAs as a percent of total assets was okay at 1.43%. Allowance for loan losses as a percent of NPLs was 58.69%.

OCFC rose 5.91% or 71 cents to close at $12.72. Bought 50 OCFC at 10.4

9. Exelon (EXC)(owned): Exelon beat the consensus forecast by 8 or 9 cents (depending on the service), though the reported "operating" E.P.S. for the second quarter of 2010 was four cents less than $1.03 earned in the 2nd quarter of 2009. The GAAP E.P.S. number was 67 cents. A number of items were included in GAAP including a 11 cent mark-to-market loss primarily from hedging activity in the generation business, 8 cents for unrealized losses relating to the nuclear decommissioning trust, and 10 cents for something dealing with income tax uncertainties. The operating utility subsidiaries, Peco Energy and Commonwealth Edison, had above normal cooling degree days. Exelon raised its operating guidance from a range of $3.7 to $4 to $3.8 to $4.10. While other utilities that I own gained ground in the 200+ move on Thursday, the market reacted with a big yawn to Exelon's numbers and the stock fell fifteen cents on the day of the release. Exelon fell again on Friday by 78 cents or 1.87% to close at $41.02.

10 SVB Financial (SIVB)(own TP SIVBO only): I monitor the results of SIVB solely for the purpose of determining the likelihood of uninterrupted interest payments for the TP SIVBO. I own 150 shares of the TP: Added 50 SIVBO at $19.15 Added 50 SIVBO AT $19.20 IN ROTH Bought 50 SIVBO at $19.49 SVB reported 2nd quarter net income of 21.1 million or 50 cents per year. Release dated July 22, 2010 That is more than satisfactory from the perspective of a TP owner.

11. Bought 50 Bank of Commerce (BOCH) at $4.46 (category 1- Regional Bank Stocks Basket Strategy)(see Disclaimer): BOCH is a very small bank based in Redding, California which owns Redding Bank of Commerce and Roseville Bank of Commerce. I had to look on the map to find the locations. Roseville appears to be a suburb northeast of Sacramento and Redding is located off Interstate 5 in what may be the middle of nowhere, near the Shasta National Forest (north of Sacramento). BOCH also owns Bank of Commerce Mortgage. All together, the bank has four full service offices in those two separate banking markets. The mortgage company was a 2009 acquisition so maybe the bank got a good price.

This bank was picked up in a Morningstar screen looking for banks with high dividends in the Pacific region. The current dividend is 6 cents per quarter or 24 cents annually. This translates into a 5.38% yield at a total cost of $4.46. The 24 cents is a reduction from the 32 cent rate in 2008.

The highwater mark for earnings was 74 cents in 2006, according to Morningstar's data, and then there was a slide to 25 cents during 2008. The banks appears to be in a recovery mode now. I placed the shares in Category 1 of the regional bank strategy for several ones. The most important is that this is a California bank and the earnings history is ragged. The return on assets and equity have been trending down since 2006. Another reason for limiting the exposure is that TARP funds are still on the balance sheet (17 million-p.14 e10vq). Some of the equity comes from over 15 million in a TP, regarded as a bond here at HQ. Under the financial reform bill recently signed into law, banks with less than 15 billion in assets, and BOCH certainly qualifies, can continue to count existing TPs as Tier 1 equity for regulatory purposes. While this is true, it does not mean that I will give it any equity value when making decisions to buy common shares.

BOCH did raise net proceeds of 28.2 million by selling shares at $4.25 in March. SEC Filed Press Release The bank raised an additional 4.4 million in April via an over-allotment also at $4.25 per share. SEC Filed Press Release I would view both offerings as dilutive to existing shareholders. The total number of shares sold by the bank was 8,280,000. That is a big increase for such a small bank. Hopefully the bank will not lose that money before paying back the government which it has not yet done. I do not have a problem with these small banks holding onto the government money for the full five years at the 5% annual dividend rate. It is a cheap form of capital for them. I would prefer that the bank was sufficiently well capitalized, and conservatively managed, that it would have declined to participate from the start.

On the other hand, the bank may have some potential in its geographic area as real estate recovers. (I know nothing about real estate in this area) And the dividend appears secure, at least for now. The last quarterly report showed 15 cents per share in earnings for the 1st quarter of 2010: e10vq The capital ratios are good (see page 37), keeping in mind the caveats expressed by me in the preceding paragraph. As of 3/31/2010, NPAs to total assets was 2.02% which indicates to me that the managers of this bank are not swashbucklers.

BOCH was mentioned in this article in TheStreet as one of six bank stocks with "safe" dividends. I would not have included BOCH since it cut its dividend, and I would never use the phrase "safe dividend" in the same sentence as "bank". I also came up with different numbers than this article for the amounts of the capital raises in 2010 (compare article numbers with references linked above).

I do not have great expectations for Bank of Commerce. I am willing to wait five to ten years just to see what happens with just a little skin in the game.

LB does not think that it is possible to work 24/7 and declines our Great Leader's invitation to do so. Any further discussion of the material news and other trades from Friday will have to wait until the next post. It may not be until Tuesday that some of the trades for Friday will be discussed, provided of course the LB "feels" like it.

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