Monday, April 25, 2011

Bought 50 DKF at $25.52/JNJ OCFC FNLC FNFG UNB HCBK/SIVB-SIVBO/ADDED 30 GE at 19.95 with Cash Flow/Snapshot of GE and Intel Purchases with Cash Flow

SVB Fianancial (SIVB), owner of the Silicon Valley Bank, reported earnings of 33 million for the 1st quarter, or 76 cents per share, up from 41 cents per share in the year ago quarter. The consensus estimate was 48 cents. While I do not own the common shares, I still own 50 shares of a trust preferred stock, SIVBO, which was issued by a Delaware Trust controlled by SIVB that owns a junior SVB bond.  The ownership of a bond, particularly a junior one, will cause me to examine periodically the credit worthiness of the issuer.  I am not currently concerned about SIVB. I recently sold 100 shares of SIVBO at a good percentage gain in order to book long term capital gains and more importantly due to my concerns about interest rate risks associated with a 7% coupon junior bond maturing in 2033 and selling near its par value. Sold 50 of Remaining 100 SIVBO at 24.9 Added 50 SIVBO at $19.15 Sold 50 of the 150 SIVBO at 24.65 Bought 50 SIVBO at $19.49 I still own 50 SIVBO shares bought in the Roth IRA Added 50 SIVBO AT $19.20 IN ROTH (October 2009)

I would recommend reading David Stockman's opinion column titled The Bipartisan March to Fiscal Madness in Sunday's NYT. I will discuss this column in a subsequent post in relation to my Canadian Dollar (CAD) Strategy.

1. Bought 50 DKF at $25.52 Last Wednesday (see Disclaimer): This brings me up to 150 shares of this trust certificate. This TC represents an undivided interest in a senior Goodrich bond owned by a Grantor Trust administered by an independent trustee.  The TC has a 8% coupon on a $25 par value.  This coupon is higher than the underlying bond which has a 7% coupon and is currently trading above its par value.  FINRA  Trading in the underlying bond is sporadic and light. DKF is vulnerable to a call at par value, plus accrued interest, by the owner of the call warrant attached to the TC. The existence of the call warrant will place a lid on DKF's appreciation above its par value which can caused a significant disparity in current yield, and YTM, between the underlying bond and DKF. I recently sold 100 shares of DKF at 26.8 due to that price being irrational in light of the call warrant.

There is no Tennessee income tax on earned income or on profits from stock sales. There is a 6% tax on certain dividend and interest payments after a standard deduction.  I would pay that tax on an interest payment made by DKF into a non-retirement account, but I would owe no state tax on the profit from selling my shares.

I still own 50 shares of DKF bought in the Roth IRA at $20. (March 2009). At that price my current yield until maturity is 10%. DKF went ex interest for its semi-annual interest payment on 3/30/2011: MS Structured Asset Corporation, DKF Stock Quote

Prospectus: This bond has a lot of interest rate risk. It matures in 2038. I am not currently concerned about the credit risk.

This is a link to the last distribution report filed with the SEC by the trustee:  SEC Filed Trustee Report 

FINRA shows that the current rating of this bond is Baa2 by Moody's and BBB+ by S & P.

This is the link to the 1998  original prospectus for the underlying bond: Distribution Statement This is a link to the SEC filings for DKF.

For those unfamiliar with Goodrich, it is an aerospace company. Many still mistakingly associate the company with tires. The common stock symbol is GR and it has been on a tear over the past two years. GR Interactive Chart The current consensus estimate is for an E.P.S. of $5.47 in 2011 and $6.29 in 2012. GR Analyst Estimates

This is a link to the 2010 Annual Report:  e10vk

2. JNJ (own:  Large Cap Valuation Strategy and Common Stock Dividend Growth strategy):  I was not pleased with the disclosures over the past several months about the sloppy manufacturing processes at several JNJ plants that produced consumer products.  I decided to stay with the company, believing that management would do whatever was necessary to correct those problems. I am reinvesting the dividend. 

JNJ shares responded well to the 1st quarter earnings release. Excluding items, the company reported a Non-GAAP E.P.S. of $1.35 and $1.25 including items. JNJ also raised 2011 guidance to a range of $4.9 to $5.  SEC Filed Press Release

3. Earnings from OCFC, FNLC, UNB, FNFG and HCBK (own: Regional Bank Stocks' basket strategy):

OceanFirst Financial (OCFC) reported a 16.7% increase in earnings per share to 28 cents. As of 3/31/2011, the net interest margin was 3.6%; the provision for loan losses decreased to $1.7 million; NPLs to total loans was 2.15%; the allowance for loan losses to NPLs was 57.25% (over 100% is preferred here at HQ); the efficiency ratio was okay at 57.59%; tangible stockholder equity per share was $10.93; and the tangible common equity ratio was good at 9.1%. There is no government preferred stock on the balance sheet.  Bought 50 OCFC at 10.4 OCFC is a small bank operating in NJ.

This is a link to the 2010 Annual Report. Form 10-K  The 2010 year end capital ratios can be found at page 30. The bank earned $1.12 per diluted share in 2010 (page 43).  The current dividend rate is 12 cents per quarter, down from a rate of 20 cents in effect prior to 2010 (page 44). At a total constant cost of $10.4, the dividend yield is about 4.61%. I use the word "constant" in that kind of sentence to emphasize a point. When the dividend is increased, my yield goes up, a simple concept, but an extremely important point compared to fixed coupon bonds.  

First Bancorp (FNLC): This small regional bank operating in Maine reported a 17.1% increase in net income to 3.1 million dollars or 29 cents per share, up five cents from the 1st quarter of 2010. NPLs to total loans increased slightly to 2.51% from 2.39% as of 12/31/2010. As of 3/31/2011, the GAAP efficiency ratio was 50.76%, which I view as okay; the net interest margin was at 3.4%; the dividend payout ratio was at 67.24% (the dividend yield is good); the tangible book value per share was $10.13; the total risk based capital ratio was in excess of 16%; and this bank still has government preferred stock on its balance sheet. That later fact has restrained my purchase of more than 50 shares. Other factors restraining additional purchases include the level of NPLs and the contraction in loan growth year-over-year.

Union Bankshares  (UNB) reported a somewhat disappointing quarter, hurt by some extraordinary items and a slight increase in the loan loss provision. UNB reported net income of 1.03 million or 23 cents per share, down from 27 cents in the year ago quarter.  Some of those charges come from the March 2011 purchase by UNB of three branches from Northway Bank. Those branches are located in Groveton, Littleton and North Woodstock, New Hampshire. SEC Filed Press Release March 17, 2011 The Board declared the regular quarterly dividend of 25 cents per share.  I own just 50 shares and this report will not cause me to buy more.

This is a link to the bank's recently filed  Annual Report for 2010.

As expected, Hudson City (HCBK) slashed its dividend (by 47%), reported an awful quarter impacted by extraordinary charges, and continued to report an extremely poor net interest margin.  Fortunately, I have only a small stake. This purchase was obviously a mistake, but I am going to stay with it for several years and reinvest the dividend.  I suspect that it will be several years for this bank to recover.

The dividend was cut to 8 cents from 15 cents. The bank reported a loss of 555.7 million in the quarter.  The bank CEO and Chairman stated that he and the Board were "committed to shareholder value". As of 3/31/2011, Hudson's NPLs increased to 2.92% of total loans; the net interest margin was a horrific 1.72%; the allowance for loan losses as a percent of NPLs is a potentially worrisome 28.8%; and the capital ratios are still okay. The only positive is that the efficiency ratio at 26%, up from 22.1% as of 12/31/2010, is still good.

First Niagara (FNFG) is one of my larger positions in the regional bank basket. There are several reasons including the dividend yield, the good capital ratios, the low NPLs to total loan ratio, the high allowance for loan losses as a percentage of NPLs, the extremely low Texas Ratio, and the growth in the bank's geographic area. With the recent acquisition of New Alliance, which I owned at the time of the acquisition announcement, FNFG now has 345 branches in the Northeast. 

FNFG reported NON-GAAP earnings of $49.8 million or 24 cents per share for the 1st quarter, up from 18 cents in the year ago quarter. As of 3/31/2011,  NPLs to total loans was at .75%; NPAs to total assets was .41%; the allowance for loan losses as a percentage of NPLs was 124.6%; the consolidated tier 1 total risk based capital ratio was 14.13%; and tangible common equity to tangible assets was 8.2%. The Texas Ratio was just 8.51%, which is just superb. I would prefer to see a lower efficiency ratio, which FNFG reported at 64.5% on a consolidated basis and 62.5% for the banking segment. 

4. Added 30 of General Electric with cash flow at $19.95 on Thursday (see Disclaimer): I have been adding to GE shares with cash flow paid into the main taxable account since the summer of 2008, and I am reinvesting the dividend. This is a snapshot of my cash flow buys of GE common shares since the Lehman failure: 

Click to Enlarge:

One advantage to having a constant stream of dividends and interest payments is that I have the freedom to make these kind of buys without worrying about the timing. The amount of the cash flow will keep the buys relatively small and spaced out in time.   

I thought that a small add was in order given the raise in the dividend, the 1st quarter earnings report, and the decline in the share price in response to the earnings release. The order was placed early Thursday morning about a dime below the existing market price, and the order was filled on a downdraft within a minute. 

GE did raise the quarterly dividend by 1 cent to 15 cents which was the third increase in the last 12 months.  Business Wire GAAP earnings increased 48% to 3.4 billion dollars or 31 cents per share. Excluding items, GE earned 33 cents per share. The consensus estimate was for 28 cents. GE Capital earned 1.8 billion after tax, so hopefully that operation is on the upswing. GECC's common ratio has improved to 9.8% from 7.8% in the 1st quarter of 2010.

5: Snapshot of Intel Purchases with Cash Flow:  

I have been following the same approach to the purchase of Intel shares since the Lehman failure:

Click To Enlarge:

Intel Purchases with Cash Flow Since Lehman's Failure
Most likely, I would start to trim GE at or above $30 per share. I may quit reinvesting the dividend when and if GE trades consistently for several months over $25.

Due to other responsibilities, primarily involving the administration of a trust where I am the sole trustee, as well as an estate (both unpaid duties), I am going to be falling way behind in discussing my trades from last week.