Wednesday, February 1, 2012

VLY UBCP/Added 50 PSEC at $10.36-Regular IRA/Sold 1 Vulcan Materials 2021 Senior Bond at 109

The Case Shiller home price index for 20 metropolitan areas declined .7% in November, a larger than expected decline. The year-over-year decline was 3.7%. The home price index is about where it was in 2003.  The largest twelve month declines were in Las Vegas at -9.1%; Atlanta at -11.8%; and Seattle at -6.3%. The largest decline from October to November was Chicago at -3.4%.

Based on a survey by the China Federation of Logistics and Purchasing, the official number, China's January PMI came in higher than expected at 50.5. The HSBC PMI China survey was lower at 48.8.

The S & P 500 had the best percentage increase for January since 1997.

The latest report is that Greece's private creditors are willing to accept a 70% haircut on their loans. CNBC Why would anyone loan the Greek government money without collateral conservatively valued at 120% or higher than the loan amount?

1. Valley National (own: REGIONAL BANK BASKET STRATEGY): VLY reported net income of $24.8 million or 15 cents a share after a non-cash impairment charge of 8 cents per share. Valley National Bancorp Reports Fourth Quarter Earnings Adjusted earnings were 23 cents per share.

As of 12/31/2011, the net interest margin was 3.74% (a 12 basis point decrease from the third quarter); the efficiency ratio was at 55.79%; total non-accrual loans as a percentage of total loans stood at 1.27%; the allowance for loan losses as a percentage of non-accrual loans was at 96.79%; and the total risk based capital ratio was at 12.65%. 

On the day of the earnings release, the stock fell 6.07% to close at $12.22. An article in  Reuters suggested that the decline was due to a decline in interest income even though the bank reported loan growth.  

Due to the abnormally low interest rate environment, I would anticipate some pressure on most bank's net interest margin. For banks to generate increases in net income, more emphasis will need to be placed on cost controls and fee income. One way to monitor the bank's willingness to tackle expenses is the "efficiency ratio", generally the bank's expenses as a percentage of revenue. A lower number indicates more efficiency. {efficiency ratio=Total non interest expense as a percentage of (net interest income (fully taxable equivalent) + noninterest income)} 

I own 250 shares of VLY. The dividend yield at the current price is over 5%. I have not been reinvesting the dividend but may start with the next dividend. VLY historically pays a 5% stock dividend in addition to its cash quarterly dividend.

Valley National closed yesterday at $11.92. At a total cost of $11.92 per share, the current dividend yield is approximately 5.7%. The shares closed at $13.01 on 1/25/12. VLY Stock Chart

2. United Bancorp (UBCP)(own: REGIONAL BANK BASKET STRATEGY): UBCP reported net income of $799,623 or 16 cents per share, up from 9 cents in the year ago quarter.  United Bancorp, Inc. Reports a 21.3% increase in Earnings This small bank based in Ohio is owned primarily for its dividend, currently at 14 cents per quarter. In the long run, dividends will be an important source of my total return for this strategy. I am reinvesting the dividend and have purchased so far 150 shares in the open market.

United Bancorp closed at $8.6 yesterday. The current dividend yield at a total cost of $8.6 would be approximately 6.51%.

3. SOLD 1 Vulcan Materials 7.5% Senior Bond Maturing in 2021 at 109 Last Friday-Regular IRA (Junk Bond Ladder Strategy)(see Disclaimer): This bond was purchased near its par value back in June 2011. Bought 1 Vulcan Materials 7.5% Senior Bond Maturing 6/15/2021 at 99.874 in Regular IRA The bond popped after Martin Marietta made a hostile takeover bid for Vulcan. Since the outcome of that battle  is not certain, I elected to harvest my profit plus close to 7 months in interest. The profit for this one bond was $63.6.

Since there was not any bid willing to accept 1 bond, I had to enter the order through a broker. I knew that there were two buyers willing to accept 2 bonds at slightly more than 109, so I entered a limit order at 109 and the bond was snapped up. It cost me an additional $10 in commission to perform a broker assisted bond trade at Fidelity.

4. Added 50 PSEC at $10.36 Last Friday- Regular IRA (see Disclaimer): PSEC pays monthly dividends and was ex dividend last Friday.  I recently discussed this Business Development Corporation at Item # 2 PSEC (1/26/2012 Post and links therein).

In 2010, I owned this security in both taxable and retirement accounts. I confirmed that most of the dividend paid last year was not classified as a qualified dividend, which is not surprising. A similar treatment can be found in dividends paid by REITs which also avoid taxation at the corporate level for the 90%+ of net income distributed to shareholders. I roughly calculated that about 8% of PSEC's 2010 dividend, paid into a taxable account, was classified as qualified in my 1099. That is one reason for buying the position in an IRA given the high yield and the dividend's non-favored tax status.

For BDCs, I would view the investment to be a success by simply selling the shares for any profit.  Any profit on the shares is viewed as gravy. The dividend yield on PSEC shares is greater than 11% at the current price.

Form 10-Q for the Q/E 9/2011 (net asset value per share at that time=$10.41) 

Prospect Capital web site

I own now over 400 shares, with 200 shares held in retirement accounts (100 in the Roth IRA and 100 Regular IRA). I am reinvesting dividends paid by the shares held in a taxable account.

Recent Important Developments: Prospect Capital and Other Shareholders Enter Into Definitive Agreement to Sell NRG, With Prospect Expected to Receive up to $114 Million in Cash, a 59% or Greater Overall Internal Rate of Return, and Approximately $30 Million of Investment Income Prospect Capital Portfolio Company Energy Solutions Sells Gas Solutions for $200 Million, Generating a 57% Internal Rate of Return and 5.5 Times Cash on Cash Return

Link To Portfolio Investments: Prospect Capital Portfolio

Prospect Capital closed at $10.32 yesterday. According to Marketwatch, the dividend yield at that price is 11.79%.

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