Monday, April 23, 2018

Observations and Sample of Recent Trades: AROW, EPRPRC, HOPE, HT, WELL

Economy

Exclusive: U.S. sorghum armada U-turns at sea after China tariffs: Reuters (4 of the 5 top sorghum exporters are in states carried by Trump: Kansas, Oklahoma, South Dakota and Texas). One endangered Democrat Senator, Heidi Heitkamp, is from South Dakota and is facing a serious challenge from South Dakota's republican congressman Kevin Cramer who is a close Trump ally. Trump beat Clinton by 36% in SD. Trump's looming trade war gives Democrats an opening in farm country: Reuters 

As previously discussed in a comment, China concluded that the U.S. was dumping sorghum into China and has required importers to put down a 178.6% deposit in anticipation of China levying tariffs on U.S. sorghum imports. This action was taken the day after the U.S. prohibited U.S. firms from selling parts to ZTE for seven years. 


Philly Fed manufacturing index points to continued growth in April - MarketWatch 

Pricey U.S. home sales soar as buyers ignore new tax code: Reuters (I would not expect this trend to last. There may be some buying now in anticipation that mortgage rates will rise.)

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Portfolio Management


The stock market has lost its upside momentum and is churning significantly below its January 2018 highs. 


Interest rates and inflation expectations are moving up and are providing a headwind for stocks. 


I am continuing to buy mostly short term bonds and CDs with the redemption proceeds of maturing ones. Yields on comparable newly issued CDs are significantly higher, but remain below what I would consider market based rates. Banks remain reluctant to increase their deposit costs as the yield curve continues to squeeze their net interest margins. 


Short term treasuries generally have slightly higher yields than similar maturity CDs. I have increased slightly my weighting in short term treasuries and investment grade corporate bonds that provide yield advantages to CDs.   


Intermediate term bonds are falling in price and rising in yield. I doubt whether any of the intermediate term bonds bought this year are in profit territory which is fine with me.  I am just nibbling and basically gradually moving up to my weighting before I slashed my allocation last year. 


I am financially able to hold all bonds to maturity. The unrealized losses will disappear over time. I suspect that there may even be a powerful bond rally later this year based on events that cause a massive flight to this asset category (e.g. more negative developments on trade; a slowdown in consumer spending; a total break down in the NK negotiations; the onset of a bear market in stocks). 


Equity REITs are by and large in a bear market that shows no signs yet of reversing. Rallies are sold and quickly snuffed out. 


Last Friday Closing Prices (normal correlations): 


VNQ $74.06 -$0.68 -$0.91%: Vanguard REIT Index ETF 


IEF $101.57 -$0.34 -0.33%: iShares 7-10 Year Treasury Bond ETF 


TLT $118.46 -$0.86 -0.72%: iShares 20+ Year Treasury Bond ETF 


XLU $50.30 -$0.46 -0.91%: SPDR Select Utilities ETF 


KRE $61.19 +$0.53 +0.87%: SPDR S&P Regional Banking ETF 


By "normal", I am referring to a more often than anticipated correlation when the move in IEF is greater than .25%. 


My approach in this sector will be to continue buying small lots and averaging down only. I will on occasion harvest a profit or two as I recently did with HT discussed below. 


Once a small ball purchase is sold, it will be removed from this list and any new purchase will to be a less than 5% below the sales price.  




Any subsequent purchase of the stocks listed above can only be made a price lower than the price shown.    


Overall, my goal now is to gradually increase the weighted average yield of my entire portfolio. That has been easy to do with the rise in short and intermediate interest rates and the decline in bond like common stocks. 


I am confident now that my interest income will more than double this year compared to 2017 and may come close to tripling.   


2018 could end up being a negative total return year for both the S & P 500 and bonds, though bonds are more likely IMO to be negative for the year than stocks.  Fixed income yields are so low that it does not take much of a value decline to wipe out the yield and then some in a total return calculation. 


Year To Date Total Returns Through 4/20/18: 


iShares 7-10 Year Treasury Bond ETF (IEF) Total Return = -3.32%

iShares 20+ Year Treasury Bond ETF (TLT) Total Return = -6.04%
iShares  Investment Grade Corporate Bond ETF (LQD)     = -4.01%
iShares TIPS Bond ETF (TIP) Total Return                           = -1.22%
S&P 500 ETF (SPY) Total Return                                            = + .31%


Bonds will move in lock step with directional moves in interest rates which is not the case for stocks whose values depend on far more variables than interest rates. A vintage bond would have to decline in price until it reach an equilibrium in yield with current rates.   

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Trump

Comey Memos Show Trump Sought Loyalty, Tried to End Flynn Probe - Bloomberg


Comey memos renew questions over Trump's behavior - CNN 


Trump's Response: 




The Comey memos bolster his claim that he didn’t leak classified information - The Washington Post  


Manafort Suspected of Serving as ‘Back Channel’ to Russia, DOJ Says - Bloomberg


Trump lied to me about his wealth to get onto the Forbes 400. Here are the tapes. - The Washington PostA new allegation says Trump lied about his wealth. Here's what we do know-CNN What would be news worthy of nationwide headlines is when Trump told the truth about anything.  


Donald Trump falsely says James Comey memos disprove collusion, obstruction | PolitiFact (claim given yet another "pants on fire" rating)

Donald's approval rating among those who call themselves evangelicals is growing and is currently at 75% and at 81% among white evangelical males. PRRI About 80% of republicans continue to view Trump as honest. A similar number believe Trump's assertions about the Fake News Media making up stories about him.  

The GOP's efforts, starting with the Nixon-Agnew administration, to undermine the free press has been successful and is probably irreversible among those already infected by those efforts.  


Trump lashes out at New York Times reporter in latest attack on press - CBS News:



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A young man, Travis Reinking, armed with an AR-15, shot and killed 4 persons at a Nashville Waffle House Saturday morning. 4 dead, 4 wounded in shooting at Waffle House in Tennessee, say Nashville police - CBS News  Last year, this guy was arrested inside a White House security barrier claiming that he had an appointment with Donald. He also thought Taylor Swift was stalking him. Travis Reinking: What we know about the Waffle House shooting suspect - CNN Authorities confiscated his weapons, apparently owned by his father, and gave them back to his dad. Authorities claim his dad gave the guns back to Reinking. The father will consequently face civil liability. 


Scott Pruitt is the target of no less than 10 federal investigations – VICE News (Yes, of course, Trump is going to drain the swamp because he repeatedly said he would do so as his True Believers cheered his classic and easily recognizable demagoguery)   


Scott Pruitt Before the E.P.A.: Fancy Homes, a Shell Company and Friends With Money - The New York Times

NYT: Pruitt purchased home from lobbyist in 2003, using a shell company - CNN

‘A factory of bad ideas’: How Scott Pruitt undermined his mission at EPA - The Washington Post


Another family values republican is having problems including criminal charges relating to an extra-marital affair. Missouri's Republican governor charged with felony computer data tamperingMissouri Gov. Eric Greitens Indicted On A Charge Of Felony Invasion Of Privacy-NPR 

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1. Bought 50 EPRPRC at $24 and 50 at $23.78-Used Commission Free Trades (two different accounts):





This is a convertible preferred stock issued by the REIT EPR Properties. 

Last Friday, the common shares closed at $53.35 which produced a 8.1% dividend yield. 


Quote: EPR Properties 5.75% Cumulative. Convertibel Preferred Series C 


Par Value: $25
Coupon: 5.75%
Dividends: Quarterly
Yield at TC of $23.89: 6.02%
Last Ex Dividend Date: 3/28/18
Conversion Price: Subject to Adjustments 

Starting Conversion Terms

"You, at your option, may convert some or all of your outstanding Series C Preferred Shares initially at a conversion rate of 0.3504 common shares per $25.00 liquidation preference, or the Conversion Rate, which is equivalent to an initial conversion price of approximately $71.34 per common share (subject to adjustment in certain events). Except as otherwise provided, our Series C Preferred Shares will only be convertible into our common shares. See “Description of the Series C Preferred Shares — Conversion Rights.”"

Optional Conversion by Issuer-Not likely anytime soon based on EPR's current stock price:

"On or after January 15, 2012, we may, at our option, convert some or all of the Series C Preferred Shares into that number of common shares that are issuable at the then applicable Conversion Rate, which we refer to as the Company Conversion Option. We may exercise the Company Conversion Option only if the Closing Sale Price of our common shares equals or exceeds 135% of then applicable conversion price of the Series C Preferred Shares for at least 20 Trading Days in a period of 30 consecutive Trading Days (including the last Trading Day of such period) ending on the Trading Day immediately prior to our issuance of a press release announcing our exercise of the Company Conversion Option and our method of payment as described above under “Conversion Settlement”. See “Description of the Series C Preferred Shares — Company Conversion Option.” (emphasis added)

EPR Properties Interactive Chart (bear trend)

Convertible securities cause the Old Geezer's head to hurt. 

Subsequent Downward Adjustments to Conversion Price

As far as I can tell, the only current downward adjustment to the original effective $71.34 per share conversion rate is the following: 


I only know for sure that EPR is now paying a quarterly common share dividend in excess of $.6875 per share which will cause a downward adjustment in the conversion price. The current dividend is paid monthly at $.36 per share or $1.44 per share on a quarterly basis. EPR Properties Declares Monthly Dividend for Common Shareholders and Quarterly Dividends for Preferred Shareholders 

In case you are wondering, I did not do the math to determine what the conversion rate is now. 

I did find this document at EPR's website that claims that the conversion price is at $64.35 as of 3/31/2018, so I will go with that calculation. Series C Preferred Stocks.PDF

I can tell you that EPRPRC was trading near $30 when the common shares were trading over $70.   

Using the 6/26/17 closing prices, EPR closed at $75.39 and EPRPRC closed at  $29.7. The premium price was due to the conversion right when the common shares were trading over $75.   

EPR.PC Stock Chart 

The common currently provides a 2% higher yield than this convertible preferred stock. The common will be more volatile. The preferred dividend can not be cut or eliminated but only deferred after EPR eliminates the common share cash dividend:




The convertible preferred shares, unlike traditional fixed coupon equity preferred stocks, has the potential to participate in the common stock's appreciation. 

I have bought and sold both EPR and EPRPRC. 

Last EPRPRC Trade:

2016 Roth IRA 50 Shares +$160.48

Closing Prices Last Friday: EPR-PC $23.80 -$0.20 -0.83%EPR $53.34 -$1.00 -1.84% 


2. Small Ball- Equity REIT Common and Preferred Stock Basket Strategy:


A. Started "Buying Program" Welltower: Bought 10 at $52 and 2 at $51.15-Used Commission Free Trades:





Quote: Welltower Inc. (WELL)


About: Welltower owns triple net, seniors housing operating and outpatient medical facility properties. 


The triple net leased properties "include independent living facilities and independent supportive living facilities (Canada), continuing care retirement communities, assisted living facilities, care homes with and without nursing (U.K.), Alzheimer’s/dementia care facilities and long-term/post-acute care facilities." 


The seniors housing operating properties include "independent living facilities and independent supportive living facilities, assisted living facilities, care homes and Alzheimer’s/dementia care facilities.  Properties are primarily held in joint venture entities with operating partners. We utilize the structure proposed in the REIT Investment Diversification and Empowerment Act of 2007, which is commonly referred to as a “RIDEA” structure (the provisions of the Internal Revenue Code authorizing the RIDEA structure were enacted as part of the Housing and Economic Recovery Act of 2008)." 


Before investing in WELL, the investor needs to understand the difference between the RIDEA structure and the typical structure where the REIT leases the property to operators. That is beyond the scope of this brief summary. {See, e.g. Why a Senior Housing 'Rough Patch' Will Not Derail RIDEA - Senior Housing News2 Structures, 2 Picks in Health-Care REITsAsset Sales Mask the Solid Performance of Welltower Inc's Senior Housing Portfolio -- The Motley Fool;Welltower Bullish on Senior Housing JVs After Stellar Results - Senior Housing News }


The outpatient medical building portfolio "consists of health care related buildings that generally include physician offices, ambulatory surgery centers, diagnostic facilities, outpatient services and/or labs. Our portfolio has a strong affiliation with health systems. Approximately 95% of our outpatient medical building portfolio is affiliated with health systems (with buildings on hospital campuses or serving as satellite locations for the health system and its physicians). We typically lease our outpatient medical buildings to multiple tenants and provide varying levels of property management.  Our outpatient medical segment accounted for 13% of total revenues for each of the years ended December 31, 2017, 2016 and 2015.  No single tenant exceeds 20% of segment revenues."


Page 24 Annual Report
2017 Annual Report 

Welltower Announces Stock Ticker Change to "WELL" from HCN


I have never owned WELL's common stock before this purchase. I did own 300 shares in a Canadian REIT that was acquired by HCN: Item # 6 SOLD: 300 HLP-UN:CA at C$14.17 (profit snapshot = US$1,039.15)


Welltower Inc. Interactive Chart: Major BEAR TREND


52 Week High at Time of Purchase: $78.17

52 Week Low: $51.82
Decline = 33.71%

6/26/17 Closing Price: $77.66

4/13/18 Closing Price: $52.63
Decline: 32.23%

While some view the share price decline as indicating a risky stock, I view the decline as a de-risking move. The price was too high and now it is at least a rational one within a zone of reasonableness based on what is known or knowable at the moment. 


Dividend: Quarterly at $.87 per share ($3.48 annually)


Dividend History – Welltower


Dividend Yield at $52:  6.69% (10 share purchase)

Dividend Yield at $51.15: 6.8% (2 share purchase)
Melded at $51.86 = 6.71% (12 shares)

Last Earnings Report at Time of Purchase (Q/E 12/31/17):





2018 Outlook:


"We are introducing our 2018 earnings guidance and expect to report net income attributable to common stockholders in a range of $2.38 to $2.48 per diluted share and normalized FFO attributable to common stockholders in a range of $3.95 to $4.05 per diluted share.  As previously disclosed, we no longer report FAD because it could be considered a liquidity metric".  


IMO, the reason given for refusing to provide funds available for distribution is bogus; and that refusal is consequently a negative item for me. 



Problem with Genesis Healthcare:

The most serious recent problem was with WELL's tenant Genesis Healthcare (GEN) which is discussed in the previous linked earnings report. As adjusted for the restructuring described therein, "Welltower's Genesis concentration will decrease from 6.8% to 5.2% and long-term/post-post acute exposure will decrease from 12.6% to 11.0%. Private pay revenue mix will increase from 94.2% to 94.7%. Additionally, post Genesis's wider restructuring, coverage after management fee will increase to 1.34x and coverage before management fee will increase to 1.73x on an as-adjusted basis."   


I discuss buying 1 WELL SU bond in Item # 3.A. below.  

Closing Price Last Friday: WELL $51.20 -$0.72 -1.39% 


B. Sold 50 HT at $19.02-A Roth IRA Account


History This Account: 




Profit Snapshot $68.53




Item # 4.A. Bought 50 HT at $17.37 (3/1/2018 Post)(I discuss the last earnings report in that post)


Quote: Hersha Hospitality Trust Cl A  (HT)


I may use the proceeds to buy HTPRD when and if the price falls below $22.5. My last purchase of that equity preferred stock was at $22.98: Item # 3.A. (3/1/2018 Post)Hersha Hospitality Trust 6.5% Cumulative Preferred Series D Stock


The HT dividend yield at a $19.02 total cost per share is 5.89%. I am not expecting a dividend increase this year. The last HT dividend increase was in 2014: Hersha Hospitality Trust - Dividends  There was a 1 for 4 reverse stock split on 6/23/15. The dividend table is adjusted for that reverse split. The quarterly dividend was slashed from $.72 to $.2 in 2009. The preferred stock dividend can not be cut, only deferred, provided a common share cash dividend is eliminated first.  Before the 1 for 4 reverse split, HT actually cut its quarterly rate from $.18 to $.05 per share:




Page 6: 10k


C. Sold 10 HT at $19.11-Used Commission Free Trade:





Profit Snapshot: +$22.79





I started a "10 share buying program" in HT using commission free trades: Item 4.B. Bought 10 HT at $16.83 (3/1/2018 Post)


Why bother? I do not have even a good bad answer. I am just not interested in this REIT at over $19. I did receive one quarterly dividend payment. 


HT Trading Profits to Date =  $322.21



3. Intermediate Term Bond/CD Ladder Basket Strategy:

A. Bought 1 Welltower 4% SU Bond Maturing on 6/1/25:


Welltower was known as Health Care REIT when this bond was issued: About Health Care REIT™ – Welltower 




FINRA Page: Bond Detail (prospectus linked)


Issuer: Welltower Inc (WELL)


Welltower Reports Fourth Quarter 2017 Results


Welltower Completes $550 Million Senior Unsecured Note Offering ("offering of $550 million in aggregate principal amount of 4.250% senior unsecured notes due April 15, 2028. The notes were priced at 99.959% of their face amount to yield 4.255%.")


Credit Ratings: 




Bought at a Total Cost of 99.462

YTM at TC Then at 4.087%
Current Yield at TC = 4.0216%

B. Bought 1 Entergy Louisiana 3.3% First Mortgage Bond Maturing on 12/1/22




Finra Page: Bond Detail (prospectus linked)


This is a first lien bond on substantially all of Entergy Louisiana's assets. 


Issuer: Entergy Louisiana, a wholly owned subsidiary of Entergy Corp. (ETR)



Entergy 2017 Annual Report (Entergy Louisiana results are discussed starting at page 326): 

Credit Ratings: 




Bought at a Total Cost of 99.763 (with $1 Fidelity Commission)

YTM at TC Then at 3.353%
Current Yield at TC = 3.3078%

C. Bought 2 Norfolk Southern 3% SU Bonds Maturing on 4/1/22-A Roth IRA Account





FINRA Page: Bond Detail (prospectus linked)


Issuer: Norfolk Southern Corp (NSC)

NSC Analyst Estimates

Norfolk Southern reports fourth-quarter and full-year 2017 results

2017 Annual Report

Recent Bond Issuances:


Prospectus for $500M in 4.15% SU Bonds Maturing in 2048 (February 2018)

Prospectus for $300M in 3.15% SU Bonds Maturing in 2027 (May 2017)
Final Prospectus Supplement for 2.9% SU Bonds Maturing in 2026 (June 2016)

Credit Ratings:





Bought at a Total Cost of  99.77 (with $4 Vanguard Commission)

YTM at Total Cost Then at 3.062%
Current Yield at TC = 3.0069%

4. Short Term Bond/CD Ladder Basket Strategy


A. Bought 2 Cadence Bank 1.6% CDs Maturing on 6/18/18 (2 month CDs)





Issuer: Operating Bank for Cadence Bancorp (CADE) 
CADE Analyst Estimates 
Cadence Bancorporation Reports Fourth Quarter 2017 Results and Initiates a Quarterly Dividend 

B. Bought 1 Treasury 1% Coupon Maturing on 3/15/19

YTM at 2.157%



C. Thermo Fischer 2.4% SU Bond Maturing on 2/1/19


I bought this bond on 4/3/18 at a total cost of 99.843. :Item # 4.A. I received a notice last Friday that the issuer will redeem this bond early on 5/4/18: 




This optional redemption is subject to a make whole. 




It looks like several companies want to refinance now rather than to wait until bonds mature early next year. This bond has a principal amount outstanding of $900M: Bond Detail I do not see any recent TMO bond offerings yet, however. SEC Filings


Today, I lost 9 BUD bonds maturing on 2/1/19 to an early redemption. 


The make whole calculation did not result in a premium to the $1,000 par values. There are two primary factors for that result: (1) the short period remaining to maturity and (2) the increase in the discount rate due to a rise in short term interest rates. 


As the discount rate increases, the make whole number goes down and vice versa. 


The discount rate is the yield on a treasury maturing at about the same time plus a few basis points. The discount rate is applied to the sum of the remaining interest payments and the principal amount. 



5. REGIONAL BANK BASKET STRATEGY:


A. Sold 100+ AROW at $34.7:



QUOTE: Arrow Financial Corp. (AROW)

Profit Snapshot: +$62.04




Item # 1.A. Added 100 Arrow Financial at $33.95 (1/15/18 Post)


I decided to trade this lot and try later for a lower re-entry price, probably in the $31.5 to $32.5 range.


Arrow Financial Corp. Interactive Chart


I still own a lower cost lot in my IB account. My average cost per share in that account is $24.76. That lot was bought at $26.25: Item # 3 Update For Regional Bank Basket Strategy As Of 3/17/16 - South Gent | Seeking Alpha After my purchase, the company has paid two 3% stock dividends that reduced by average cost per share.


Arrow Financial Corporation Declares Stock Dividend (August 2017)

Arrow Financial Corporation Declares Stock Dividend (August 2016)

Regional Bank Basket Net Realized Gain: $42,097.38  (start date April 2009)


Closing Price Last Friday: AROW $34.75 -$0.25 -0.71% 


B.  Started "10 Share Buying Program for HOPE-Bought 10 at $17.3-Used Commission Free Trade





Consensus E.P.S. Estimates (Day of Purchase)

2018: $1.55
2019: $1.64
P/E at $17.3 Price and $1.64 E.P.S. Estimate= 10.55
Estimated E.P.S. Growth Rate: 5.8% 

HOPE Analyst Estimates


HOPE will receive an earnings boost this year from the federal corporate tax reduction to 21%. That is a one time boost in Y-O-Y E.P.S. comparisons. E.P.S. growth in 2019 will depend on operations. 


Investors had a negative reaction to HOPE's 1st quarter report, which was released after the market closed on Tuesday (4/17):


Closing Price Wednesday 4/18/18:  HOPE $17.32 -$0.77 -4.26% 


My last purchase was in my Schwab account at $18.04. Item # 2.A. Bought 50 HOPE at $18.04-Used Commission Free Trade (1/11/18 Post) 


Prior Round-TripItem 1.A. Sold  50 HOPE at $19 (11/4/17 Post)-Item 1.B. Bough 50 HOPE at $15.6 (9/14/17 Post)


Dividend: Quarterly at $.13 ($.52 annually)


Dividend Yield at $17.3 TC = 3%


Last Earnings Report: Q/E  3/31/18


Hope Bancorp Reports Record Net Income of $51.2 Million and EPS of $0.38 for 2018 First Quarter 


I was not disappointed with this report, though it did contain some potentially worrisome items relating to increases in NPLs and a modest downtick in net interest margin excluding accretion income. The bank is not seeing a net benefit yet flowing from higher rates given the rise in deposit costs. That issue is probably the main cause of the 4.26% price decline on 4/18/18. 


I was disappointed that the Board elected to continue the $.13 quarterly dividend rate given that the bank is a major beneficiary of the corporate tax reduction. The last quarterly dividend raise was 1 cent per share effective for the  


The failure to raise the dividend by even a penny per share sends the wrong signal to investors, suggesting that the Board and management are concerned about something that is not readily apparent to its shareholders. 


E.P.S. $.38 up from .27% in the 2017 first quarter

Net interest margin 3.66%
NIM Without Accounting Accretion(temporary NIM bump): 3.39%
Nonperforming assets/total assets .97%
Nonperforming loans/loans receivable 1.15%
Allowance for loan losses/nonperforming loans 66.69%
Nonaccrual loans/loans receivable .6%

Allowance for loan losses/nonaccrual loans 129.86%
0.97%
Net charge offs/average loans receivable (annualized) .02%
Return on assets (“ROA”) 1.44%
Return on equity (“ROE”) 10.61%
Return on average tangible equity 14.13%
Efficiency ratio 48.92%
Total risk-based capital ratio 13.86% 
Tangible common equity to tangible assets 10.44%
Tangible Book Value Per Share = $10.81
Book Value Per Share = $14.35


"The Company defines nonperforming loans to include delinquent loans past due 90 days or more on nonaccrual status, delinquent loans past due 90 days or more on accrual status (excluding purchased credit-impaired loans) and accruing restructured loans.  Nonaccrual loans at March 31, 2018 increased to $68.2 million, or 0.60% of loans receivable, from $46.8 million, or 0.42% of loans receivable, at December 31, 2017 and $37.0 million, or 0.35% of loans receivable at March 31, 2017. Accruing restructured loans amounted to $59.6 million at March 31, 2018, compared with $67.3 million at December 31, 2017 and $49.0 million at March 31, 2017. Total nonperforming loans at March 31, 2018 increased to $129.6 million, or 1.15% of loans receivable, from $114.4 million, or 1.03% of loans receivable December 31, 2017 and $86.3 million, or 0.82% of loans receivable at March 31, 2017."

The increase in non-performing and nonaccrual  loans is a negative at this point in the credit cycle. I do not view that increase as troubling yet. The net charge off ratio at .02% was excellent and below the .52% average level: Chart: Charge-Off Rate on All Loans, All Commercial Banks-St. Louis Fed 

Hope Bancorp's (HOPE) CEO Kevin Kim on Q1 2018 Results - Earnings Call Transcript | Seeking Alpha("Excluding purchase accounting adjustment, our net interest margin declined 6 basis points to 3.39%... With our increase in interest rates by the Feb and late March, we would expect that our loan yield will increase in the next quarter as our variable rate loans are re-priced. However, much of this increase is expected to be offset by an increase in our cost of deposits. ..  During the first quarter, we saw a number of previously identified problem loans migrating to non-accrual status while charge-offs and new inflow into problem loans remained very low. Our non-accrual loans increased $21.4 million.")  


The company is expecting an effective tax rate of 25% this year, which includes state income taxes net of the federal deduction. 


Effective Tax Rates:



Page F-54 2017 Annual Report (the 2017 4th quarter  revaluation of a  deferred tax asset added a one time 9.36% increase to the effective rate for that year)

Closing Price Last Friday: HOPE $17.560 +$.14  +0.804% 

DisclaimerI am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.

10 comments:

  1. Earlier today, the ten year treasury hit 3% but has retreated a bit in yield since then:

    2.981% + 0.02%
    Last Updated: Apr 23, 2018 at 12:47 p.m. EDT
    https://www.marketwatch.com/investing/bond/tmubmusd10y?countrycode=bx

    I mentioned in this post paring my Arrow Financial (AROW) position.

    Arrow Financial Corp.
    $34.90 + $0.15 +0.43%
    Last Updated: Apr 23, 2018 12:13 p.m. EDT
    https://www.marketwatch.com/investing/stock/arow

    Earlier today, Arrow reported its 1st quarter results:

    https://www.prnewswire.com/news-releases/arrow-reports-increase-in-first-quarter-net-income-double-digit-loan-growth-continues-300634367.html

    The results were sufficiently positive IMO that I have no intention of selling the lower cost remaining lots.

    "Net income for the first quarter of 2018 was $8.5 million, an increase of $1.9 million, or 28.7%, from net income of $6.6 million a year earlier. Diluted earnings per share (EPS) for the first quarter was $0.61, an increase of 29.8% from diluted EPS of $0.47 during the comparable 2017 quarter."

    "Annualized key profitability ratios continue to remain strong, as measured by a return on average equity (ROE) of 13.78% and a return on average assets (ROA) of 1.25% for the first quarter, compared to 11.43% and 1.02% a year earlier."

    Net Interest Margin 3.21%
    Efficiency Ratio 57.23%
    Nonperforming Assets to Period-End Assets .22%
    Nonperforming Loans to Period-End Loans .23%
    Charge Off Ratio .06%
    Total Risk-Based Capital Ratio 15.04%

    ReplyDelete
  2. Washington Trust Reports Record First Quarter 2018 Earnings:

    https://globenewswire.com/news-release/2018/04/20/1483573/0/en/Washington-Trust-Reports-Record-First-Quarter-2018-Earnings.html

    Effective Tax Rate: 20.8%
    Diluted E.P.S. $.93 vs $.68 1st Q 2017
    Net interest margin 3.03% vs 2.87%
    NPL Ratio = .31%
    Return on average assets 1.45 %
    Return on average equity 15.96%
    Return on average tangible equity 19.40%

    E.P.S. received a big boost from the lower effective tax rate which took effect on 1/1/18. The effective tax rate for the 2017 first quarter was 32.7%:

    Page 49:
    https://www.sec.gov/Archives/edgar/data/737468/000073746817000073/form10-q2017q1.htm

    Washington Trust Bancorp Inc. (WASH):
    $57.00 +$ 0.90 +1.60%
    Last Updated: Apr 24, 2018 10:28 a.m. EDT
    https://www.marketwatch.com/investing/stock/wash

    Transcript:
    https://seekingalpha.com/article/4164876-washington-trust-bancorps-wash-ceo-ned-handy-q1-2018-results-earnings-call-transcript

    I see no reason yet to harvest my profit on shares with a total average cost per share of $15.34.

    ReplyDelete
  3. I would attribute the acceleration of the stock decline this morning to the MMM earnings report:

    3M Co.
    $198.10 -$17.78 -8.24%
    Last Updated: Apr 24, 2018 at 12:32 p.m. EDT
    https://www.marketwatch.com/investing/stock/mmm

    MMM lowered its 2018 guidance. The new E.P.S. guidance is between $10.20 to $10.55, down from the previous guidance range of $10.20 to $10.70. The first quarter E.P.S. missed the consensus estimate of $2.52 by two cents. The company also lowered its organic sales guidance from 3% to 4% from a prior range of 3% to 5%.

    ReplyDelete
  4. Bonds are going down with stocks. There was no flight to quality today resulting from a stock decline.

    The iShares 7-10 Year Treasury Bond ETF (IEF) made a new 52 week low today:

    $101.35 -0.12 -0.12%
    DAY RANGE
    $101.26 - $101.45
    52 WEEK RANGE
    $101.26 - $108.81
    https://www.marketwatch.com/investing/fund/ief

    Longer duration treasuries had greater percentage declines than shorter duration ones:

    iShares 20+ Year Treasury Bond ETF
    $117.95 -$0.54 -0.46%
    52 WEEK RANGE
    $116.51 - $129.57
    https://www.marketwatch.com/investing/fund/tlt

    iShares Investment Grade Corporate Bond ETF hit a new 52 week low today:

    $115.08 -$0.34 -0.29%
    DAY RANGE
    $114.99 - $115.44
    52 WEEK RANGE
    $114.99 - $121.85
    https://www.marketwatch.com/investing/fund/lqd

    The ten year treasury yield is at 2.998%:
    Last Updated: Apr 24, 2018 at 4:50 p.m. EDT
    https://www.marketwatch.com/investing/bond/tmubmusd10y?countrycode=bx

    Besides the MMM earnings and guidance issues mentioned above, a number of firms mentioned commodity input inflation as having a negative impact on earnings.

    One of those firms was Caterpillar:
    $144.44 -$9.55 -6.20%
    https://www.marketwatch.com/investing/stock/cat

    https://www.reuters.com/article/brief-caterpillar-says-price-vs-cost-wou/brief-caterpillar-says-price-vs-cost-would-be-negative-for-rest-of-2018-conf-call-idUSFWN1S113Z

    CAT is being negatively impacted by Trump's steel tariffs.

    The rise in interest rates gave regional bank a lift:

    S&P Regional Banking ETF (KRE)
    $62.13 +$0.41 (+0.66%)

    S&P 500 -35.73 (-1.34%)

    My leading gainers in the regional bank sector today were BBT, ONB, VLY and WASH:

    BB&T Corporation (BBT)
    54.02+0.49 (+0.92%)
    https://finance.yahoo.com/quote/BBT/?p=BBT

    Valley National Bancorp (VLY)
    12.37+0.17 (+1.39%)
    https://finance.yahoo.com/quote/VLY?p=VLY

    Washington Trust Bancorp, Inc. (WASH)
    $56.70 +$0.60 (+1.07%)
    https://finance.yahoo.com/quote/WASH?ql=1&p=WASH

    Old National Bancorp (ONB)
    $18.05 +$0.35 (+1.98%)

    Investors have responded favorably to ONB's 1st quarter report released before the market opened on Monday:

    https://globenewswire.com/news-release/2018/04/23/1485231/0/en/Old-National-reports-record-1st-quarter-net-income-of-48-0-million-a-33-increase-from-a-year-ago.html

    BBT reported earnings on 4/19:


    https://www.prnewswire.com/news-releases/bbt-reports-record-quarterly-earnings-of-0-94-per-diluted-share-up-0-17--or-22-compared-to-fourth-quarter-2017--300632646.html

    REITs had a good day but the overall dominant trend remains a bear market one.

    Vanguard Real Estate Index Fund (VNQ)
    $74.27+0.28 (+0.38%)

    Among my currently owned equity REITs, I had +.5% or greater gains today in DOC, GMRE, GOV, GPT, HTA, IRM, LTC, LXP, MPW, OHI, SBRA, SGP.AX, SNR, WELL, and WPC. Many of those purchases are of recent origin and are part of my small ball buying programs. The only loser was BRG which was down .46%. IRT was unchanged while APLE, DEA, SIR, STAG and the ETF VNQ were up less than .5%. I view the overall performance as an anomaly on a day that intermediate term interest rates trended up. The KRE gain today would be viewed as normal and consistent with the earnings and uptrend in interest rates. Banks do not have commodity cost inflation and are major beneficiaries of lower corporate tax rates.

    ReplyDelete
  5. Hello southgent,

    I had two questions for you

    1. It looks to me like despite all the headlines and handwringing and news about a rising 10 year treasury over 3%, the market remains in a trading range. I guess somewhere between 2800 – 2575 approximately.

    Although the Vix is been moving up there certainly have been no trigger events. What is surprising to me that only energy and financial seem to be holding up the S&P, with consumer Staples hitting a close to a two-year low and even the technology stocks getting hit.

    I don't really understand what's holding up the market and I wondered what your thoughts were on my ideas as above. I plan to trade this area for as long as it holds.

    2. You wrote recently this

    "It is hard for me to the U.S. ten year going much above 3% as long as the German 10 year is hovering near .6% with other 10 year sovereign debt issues well below 2%.

    Switzerland 0.07%
    Netherlands 0.73%
    France 0.80%
    Spain 1.26%
    U.K. 1.48%
    Japan 0.05%

    https://www.bloomberg.com/markets/rates-bonds

    Historically, the stock market has done just fine with the ten year treasury in a 3.5% to 4.5% range. "

    It looks to me like the market is markedly overreacting to the 10 year treasury of 3%. And I wondered what you thought about how high the 10 year could possibly go this year?


    Also, it is not clear to me why lower rates in other countries as referenced above in the 10 year keeps a lid on the US 10 year rate. I would appreciate your explanation.

    Once again, thank you

    ReplyDelete
    Replies
    1. G: Earnings and optimism about future earnings are holding up the market.

      The rise in interest rates from one abnormally low level to another is not sufficient to derail that optimism about the future, and it is all about the future for stocks.

      When looking at how the stock market performed during various interest rate cycles, it is important to keep in mind that corporate debt has skyrocketed in recent years and a large percentage of that increased debt was not put to productive uses. When the debt has to financed and refinanced at higher and higher rates, then debt incurred to buy stock at high levels may not look so hot. The use of debt to fund stock purchases provides fuel for a bull market but there will be a reckoning.

      Bonds react more in a mechanical fashion to a rise in interest rates. If an investor bought a ten year 1.7% coupon treasury a year ago at par value, and the current rate is 2.95% for a nine year treasury, the 1.7% coupon bond will go down in price until it is produces a 2.95% yield.

      As to how high rates will go, I would start with an opinion on what would be the normalized yield for the ten year treasury without manipulation by central banks. That analysis would generally result in an approximate 2% spread over the anticipated average annual inflation rate over the next ten years. That analysis would result in a current normalized ten year yield in the 4% to 4.5% range.

      A free market, where investors fix rates uninfluenced by CB rate manipulation through abnormal monetary policies, does not exist, but inflation pressures are mounting that could easily cause an acceleration away from those policies.

      My current guess is that the U.S. 10 year yield will stall and churn somewhere in the 3.25% to 3.5% range late this year.

      The main issue is whether inflation and inflation expectations will cause central banks, including the European ones, to raise short term interest rates faster and higher than currently expected and to abandon QE programs.

      If that happens, then ten year sovereign debt yields will rise in Europe and the current lid on U.S. intermediate and longer term rates could blow off. That could precipitate a bear market in stocks provided it was sufficient to undermine the bullish growth in profits thesis that is still the prevailing one.

      The stock market is reacting negatively to two basic secular trends already: (1) the negative impact on profit margins resulting from a rise in production costs and the inability to offset rising costs with increases in prices for many companies (e.g. consumer staples) and (2) a rise in interest rates and inflation expectations as reflected in the break-even inflation rates embodied in TIP pricings that will raise debt refinancing costs dramatically compared to the extremely abnormally low rates prevailing for several years.

      Part of the increase in inflation expectations is tied to commodity inflation which is generally not sticky.

      There is no telling what crude oil prices will be in 6 to 12 months for example. Maybe WTI will be at $70 or at $40.

      A lot of what I do in portfolio management and asset allocations is based on a recognition that I do not know the future. I can identify risks however. The portfolio configuration is thus addressing alternate scenarios that are often contradictory.

      For example, since I expect interest rates to rise throughout the maturity spectrum, my fixed income allocation is weighted heavily on the short end, but I own longer term bonds, primarily high quality Tennessee municipal bonds, that would do well when there is a major correction in stocks, a flight to safety and/or a recession that causes downward pressures on interest rates. And I am starting to nibble on intermediate term bonds that have risen significantly in yield since I substantially pared my allocation last year.

      Delete
  6. The rise in interest rates is having a positive impact on the U.S. Dollar's value.

    U.S. Dollar Index (DXY) 91.21 +0.46 +0.43%
    Last Updated: Apr 25, 2018 at 12:12 p.m. EDT

    DXY Chart (recently pierced 50 day SMA line to the upside):
    https://www.marketwatch.com/investing/index/dxy/charts

    The CHF/USD exchange rate was over 1.08 on 2/15/18 and is now near 1.02.

    https://www.xe.com/currencycharts/?from=CHF&to=USD&view=1Y

    That decline has created a Double Whammy in my USD priced NVS position since the ordinary shares priced in CHFs have also declined.

    ReplyDelete
  7. I discussed buying a starter position in Welltower in this post. "Position" is too strong of a word for 12 shares, more like an after thought occurring after a toilet flush.

    I noticed that Reuters has a story that WELL and a non-profit hospital operator have made a $2B offer to acquire the troubled Quality Care Properties. QCP is the largest landlord for HCR ManorCare which filed for bankruptcy protection in March.

    https://www.reuters.com/article/us-quality-care-m-a-welltower-exclusive/exclusive-promedica-welltower-in-bid-to-acquire-quality-care-properties-sources-idUSKBN1HW2GY

    https://www.prnewswire.com/news-releases/quality-care-properties-reaches-agreement-with-hcr-manorcare-to-effect-orderly-transition-of-skilled-nursing-assisted-living-hospice-and-homecare-businesses-to-qcp-ownership-300607409.html

    QCP was spun off HCP in 2016, mostly an amalgamation of properties that HCP wanted to dump including the HCR Manorcare facilities.


    https://www.prnewswire.com/news-releases/hcp-inc-completes-spin-off-of-quality-care-properties-inc-300354242.html

    Upon release of that scoop, WELL shares fell briefly below $50 and are now moving back up:

    Welltower Inc.
    $50.37 -$0.66 -1.28%
    Last Updated: Apr 25, 2018 at 3:11 p.m. EDT
    https://www.marketwatch.com/investing/stock/well

    I would not say that I was thrilled to learn about this possibility. Maybe I will buy 3 more shares at below $49.5.

    ReplyDelete
  8. Some favorable earnings reports today relieved some of the anxiety caused by rising interest rates.

    The 10 year treasury closed at 3.03% yield.

    The highest close during the 2013 interest rate spike was at 3.04% (12/31/13):

    https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2013

    One of the favorable earnings reports came from Norfolk Southern (NSC). I discuss buying a NSC bond in this post.

    Quote from report:

    "First-quarter net income was $552 million, up 27 percent year-over-year, a result of a 10 percent increase in income from railway operations and a lower effective income tax rate. Diluted earnings per share were $1.93, up 30 percent year-over-year and a first-quarter record."

    https://www.prnewswire.com/news-releases/norfolk-southern-reports-first-quarter-2018-results-300635924.html

    Norfolk Southern Corp.
    $145.96 +$10.99 +8.14%
    https://www.marketwatch.com/investing/stock/nsc

    Boeing also responded favorably to its earnings report:

    $342.86 +$13.80 +4.19%
    https://www.marketwatch.com/investing/stock/ba

    The VIX hit its high at 19.84 early in the day and trended down to close at 17.84, down .18%. The VIX is in a Stable Vix Pattern as defined in my Vix Asset Allocation Model, though a Trigger Event almost happened using my standard definition criteria last February.

    I am noticing down movements in corporate bond ask prices throughout the day. While that can occur with some issues, it is becoming more prevalent now. Sellers are not willing to wait long before lowering their ask price as opposed to keeping the price in place until some buyer hits it. In other words, sellers are becoming more motivated to sell.

    A few days ago, I noticed a variety of 2026 bonds rated BBB or BBB+ with 4% YTMs, and that yield level has now migrated down into 2025 maturities and has seeped into 2024.

    E.G. Ventas 3.5% maturing on 2/1/25 rated Baa1 at a 4.188% YTM based on today's last trade:

    http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C623815&symbol=VTR4200526

    and an AT & T 3.95% rated Baa1 maturing on 1/15/25 at 4.177%:

    http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C649225&symbol=T4346719

    As shown in the FINRA chart, that bond was trading at over 108 in 2016 and is now still sinking at 98.68.

    ReplyDelete
  9. I have published a new post:

    https://tennesseeindependent.blogspot.com/2018/04/observations-and-sample-of-recent_26.html

    ReplyDelete