Thursday, March 29, 2012

First Niagara/XIN/Bought 60 HBNC at $17.55/BOUGHT 50 BUSE at $5-LT/Bought 1 Norcraft 10.5% Senior Second Lien Bond Maturing 12/15/2015 at 87

I did vote against the members of the First Niagara Board of Directors up for re-election and all proposals relating to compensation. I will continue to do so for as long as the current Board and management are in place. Eventually, I will sell my position and hopefully invest the proceeds in a bank less inclined to destroy shareholder value in pursuit of grandiose schemes. First Niagara: Just Another Incompetent Bank Board of Directors The richly compensated CEO of First Niagara called the $1 billion acquisition of HSBC branches in a dwindling market a "home run". Transcript - Seeking Alpha In a prior post, I mentioned that this statement called into question his ability to make sound judgments. Item # 3  First Niagara Dividend Slash The home run was hit by HSBC. First Niagara hit themselves with a fast ball in the groin.

I would not even regard it as debatable that the bank overreached with this acquisition. FNFG-Destruction of Shareholder Value The acquisition was funded in part by a 50% reduction in the dividend, the sell of over 52 million shares of common stock at $8.5 (Form 8-K), near a ten year low for the stock price (FNFG Interactive Chart); a $350 offering of preferred stock richly priced at 8.625% until 2/15/2017 and then at a whooping 7.375% spread over 3 month LIBOR unless redeemed (Pricing Term Sheet), which will restrain common stock dividend increases in my opinion; and a $300 million dollar 7.25% subordinated note maturing in 2021 (SEC Filing).

An article purportedly authored by a student investment club at Harvard contains positive comments about Xinyuan Real Estate. I own 100 shares as part of my Lottery Ticket Basket Strategy.  I have only recently moved into profit territory. Bought 50 XIN at 2.57-LT Added 50 to LT XIN at 2.36 This company did pay a small dividend of 10 cents per share last June. Xinyuan Real Estate Co. Ltd. ADS  (XIN)  There is a transcript of the CEO discussing 4th quarter results.  Seeking Alpha The company does file reports with the SEC. This is a link to the sec  filed press release announcing 2011 4th quarter earnings which were reported at 38 cents per ADS. The stock rose 17 cents in trading yesterday to close at $3.

According to Marketwatch, the ex dividend date for Zurich Financial's annual dividend is 4/2/12. I am referring to the ADS ZFSVY. BOUGHT 100 ZFSVY at $24.72

1. Bought 60 Horizon Bancorp (HBNC) at $17.55 Last Monday (Regional Bank Basket Strategy)(see Disclaimer):  This bank has offices in northwestern Indiana and southwestern Michigan, generally following the curvature of Lake Michigan from Hammond, Indiana to St. Joseph/Benton Harbor, Michigan. Locations and Hours The market capitalization of this bank at its current price is approximately $88 million.

This purchase was a partial fill on a 100 share limit order. Since I was willing to buy 100 at $17.55,  I will place a limit order for 40 shares when I can hit a ask price below $17.5.

For the 2011 4th quarter, the bank reported net income of $3.5 million or $.68 per diluted share, up 23% from the same period in 2010.  SEC Filed Press Release

I was unaware of Horizon until I noticed last week a news item that the bank raised its quarterly dividend 8.33% to 13 cents per share. SEC Filed Press Release As of 12/31/2011, the consolidated total capital ratio was 14.2% and 13.14% for the bank; tangible book value per share was reported at $20.37; net interest margin was 3.95%; and NPLs stood at 2.02% of total loans.

For 2011, the bank reported diluted earnings per share of $2.27, up from $1.81 in 2010.

There has been insider buying. HBNC Insider Transactions

Horizon's stock has already returned to its pre-recession levels. HBNC Interactive Chart That performance has to be contracted with Citigroup and Bank of America. A 5 year chart of BAC stock reveals a 80% loss of its value, while Citigroup has lost more than that ignoble sum. So, while earnings potential is not as great for a small bank like HBNC, it is far less likely to blow itself up on idiotic schemes and investments hatched by outrageously over-compensated Masters of Disaster who totally lack a grain of common sense.

The time to buy HBNC at a deep discount to its value was in March 2009 when the share price hit $7.5. Since the stock price has more than doubled from its recession lows, I am buying it now for far more modest total return expectations. It would be helpful for the Board to increase the dividend every year by 5% to 10%. Given the earnings of this bank, there is a lot of room for dividend increases.

Horizon recently entered into a merger agreement to acquire  Heartland Bancshares, Inc, a very small banking institution headquartered in Franklin, Ind. SEC Filing I spent a few minutes looking at this bank. It currently has 6 banking offices in central Indiana, near Indianapolis, and three of those are in Greenwood. The others are in Franklin, New Whiteland, and Bargersville. Locations Heartland Community Bank These towns are basically suburbs south of Indianapolis.

This small bank did not have current financial reports at its website, and no recent earnings reports have been filed with the SEC either. EDGAR For 2010, the bank reported a net loss of 31 cents per share, down from a 77 cent per share loss in 2009. annualreport2010.pdf Heartland had a total capital to risk-weighted assets ratio of 14.7% as of 12/31/2010 (note 15).  Heatland had government preferred stock on its balance sheet as of 12/31/2010 (note 18) I would not have bought shares in this bank. The only reason to buy it, in my opinion, would be for Horizon to expand its geographic service territory into the Indianapolis market. Hopefully, the Heartland acquisition would be a better way to acquire customers and branches compared to the alternatives.

Horizon did participate in TARP, receiving $25 million dollar in exchange for cumulative equity preferred stock issued to the U.S. government.  SEC Form 8-K The bank reduced that amount to $18.75 million by repurchasing preferred stock on 11/10/2010. Last August, the bank issued $12.5 million in non-cumulative preferred stock and used those proceeds, along with other available funds, to redeem the remainder of the government's cumulative preferred stock, 10-K at page 6.

Horizon Bancorp rose 16 cents in trading yesterday to close at $17.69.

2. Bought 50 First Busey (BUSE) at $5 Last Monday (Lottery Ticket Basket Strategy)(see Disclaimer): This bank almost qualified for a 100 share purchase under the Regional Bank Basket Strategy, but I want to see more evidence of a successful turnaround before committing more cash. I therefore placed a LT classification on this purchase which limited my purchase amount to less than $300.

First Busey has its headquarters in Champaign, Illinois. The operating bank has 33 banking locations in downstate Illinois, one banking center in Indianapolis, and 7 branches in southwest Florida.

Prior to the Near Depression, this stock was trading over $20 per share. BUSE Interactive Chart The stock started to crater in 2008 and fell precipitously 2009. The stock closed at $18.05 on 1/2/2009, BUSE Historical Prices, and hit $3.26 on 11/25/2009. Obviously, something bad happened to this bank. A perusal of the 2009 Annual Report reveals some of the problems.

The annual dividend was 80 cents per share in 2008 and had been cut to a 40 cent annual run rate per share in 2009. The bank reported a GAAP loss in 2009 of $7.85 per share, up from just a terrible loss of $1.06 per share in 2008 (page 26, 2010 First Busey Annual Report-SEC Form 10-K Net charge offs to average loans was 7.96% (page 44).  NPLs and NPAs to total loans stood at 3.71%.  I did not want to buy any shares of this bank until I saw significant improvement. Those numbers are just awful.

The dividend was cut further from 40 cents annually to just 16 cents per year now, paid quarterly at 4 cents per share. That dividend history is further evidence of financial stress due to bad loans.

The 2011 Annual Report does contain evidence of a turnaround. For 2011, net charge offs to loans fell to 1.73% from 2.53% in 2010 (page 48). NPLs and NPAs to total loans declined to 2.28% (page 50). The allowance for loan losses to NPLs  was at 151.91%. SEC Filed Press Release 2011 4th Quarter Earnings The total capital to risk weighted assets ratio was at 18.65% and a Tier 1 capital to risk weighted assets ratio of 17.35%. The bank was profitable in both 2010 and 2011. For 2011, the bank reported net income available to common shareholders of $24.531 million or 29 cents per share, up from 27 cents per share in 2010.

For the 3 months ending in December 2011, the efficiency ratio was 64.83% and the net interest margin was 3.44%. Tangible book value per share was $3.46 on 12/31/2011.

The bank did redeem the government's cumulative preferred stock issued under TARP. In its place, the bank issued non-cumulative preferred stock in the amount of $72.644 million as part of the small business lending program. (pages 54-55). That preferred stock is included in the bank's TIER 1 capital.

Overall, the bank is showing some improvement, sufficient for a purchase under the LT strategy only. I will need to see continued improvement throughout 2012 before I would consider buying another 50 shares.  The consensus estimate is for 26 cents in 2012. BUSE Analyst Estimates I would want to see that number over 40 cents.

With a LT, I can wait a long time. If the bank returned to the 2008 annual dividend level of 80 cents per share, several years into the future, which may be too optimistic to even contemplate the mere possibility, the dividend yield would be 16% at a $5 total cost. Needless to say, the price would not be $5 per share under that dream scenario.

LB has a shorthand word for "too optimistic to even contemplate the mere possibility",  and that is "irrational".  The best case scenario would be a return to 80 cents in 10 to 12 years. I would not even anticipate a dividend raise in 2012.

First Busey fell 1 cent in trading yesterday to close at $5.02.

3. Bought 1 Norcraft 10.5% Senior Second Lien Bond Maturing 12/15/2015 at 87 Last Monday (Junk Bond Ladder Basket Strategy)(see Disclaimer): Norcraft is a private company that manufactures kitchen cabinets. Company Information - Businessweek The company markets cabinets under six main brands: the Mid Continent Cabinetry, Norcraft Cabinetry, Ultracraft, StarMark Cabinetry, Fieldstone Cabinetry and Brookwood.

I would not anticipate that this company to report consistent annual profits without a recovery in the new housing market. In the current environment, I would assign a high risk grade to this bond due to the amount of leverage as well as the current lack of profitability.

The company recently reported an annual loss for 2011 of $3.731 million on revenues of $269.305 million. A profit of $3.191 million was reported for 2010. SEC Filed Press Release

According to FINRA, this bond is currently rated B3 by Moody's and B by S & P.  As of 12/31/2011, there was $240 million of this bond outstanding.  I did not see any other debt on the balance sheet.  The credit facility matures in September 2015 and has aggregate commitments of $25 million, Form 10-Q at page 19.

This bond was originally issued in two private placements and later exchanged for identical ones registered with the SEC. Definitive Prospectus ($60 million) and Definitive Prospectus ($180 million)

The issuers of this bond are Norcraft Companies, L.P. and Norcraft Finance Corp. There is a guarantee from Norcraft Canada subject to certain exceptions. This is a secured note. The collateral is described at pages 6-7. Any funds provided by the secured credit facility would be secured by a first priority lien.

I bought this bond in a Vanguard brokerage account where the commission is $2 a bond for Voyager customers. Since I bought only one, and will most likely not buy another given the risk, my total commission cost was just $2.

Website: HOME
2010 Annual Report: Form 10-K

According to my confirmation, the yield to maturity at my cost is 15.115%. This is the bond substituted for the 2029 RRD bond recently sold. 

No comments:

Post a Comment