Drip Portfolio Report
Monday, April 18, 1998
by Dale Wettlaufter (DaleW@fool.com)

ALEXANDRIA, VA (April 18, 1998) -- We're pretty much coming to the end of the income statement glossary, so we'll move onto the balance sheet next. Before we do that, one clarification on noninterest income and one very important income statement item need to be added to the glossary.

Noninterest Income

Noninterest income is an element of revenues distinct from a company's net interest income. Elements of noninterest income include asset management fees, mortgage servicing income, trading account or general securities gains or losses, brokerage and investment banking income, general service fees, credit card income (if not consolidated), and gains on sale of securitized receivables or loans.

Gain on Sale Accounting

Gains on sales of loans or receivables are covered in an accounting rule mandated by Statement of Financial Accounting Standards 125 of the Financial Accounting Standards Board. Under this accounting regime, a company must account for a "gain on sale" when it disposes of loans or receivables. Further, when it retains the right to service those receivables in the future or holds rights to receive interest from a pool of securities above and beyond that investors in those securities can contractually expect to receive, the present value of those expected cash flows increases the gain on sale.

As we laid out in the definition of securitization: "The residual asset created when these loans are sold represents the net present value of cash flows the company will receive for servicing the assets held by the trust. The creation of these excess servicing rights, which are intangible assets, is represented on the income statement as a gain on sale of assets. That income is non-cash because it represents the present value of cash to be received in the future. Those cash flows are represented in future periods on the cash flow statement and on the balance sheet as a reduction in excess servicing rights."

The value of these securities can be unstable, though, and sometimes a company has to reverse earlier gains that it had recorded. Such was the case with Green Tree Financial (NYSE: GNT), which is in the process of being acquired by insurer Conseco Corp. (NYSE: CNC). The revaluation of securities -- the so-called "non-cash" addition to reserves -- is simply a reversal of non-cash earnings the company has booked in past periods. Since the company doesn't now expect to receive future cash flows as large as it had thought when it booked earnings in past periods, it has to run that revaluation of mortgage servicing rights through the income statement as a reduction to earnings. By marking down the value of these securities, it is saying, "We expect cash flows from these rights to be less than expected."

That's it for today. Have a great Monday night.


FoolWatch -- It's what's going on at the Fool today.


Stock Close Change INTC 76 1/2 +1 5/16 JNJ 71 3/8 -1 3/16
Day Month Year History Drip 0.58% (1.54%) 5.65% (10.03%) S&P 500 0.08% 1.99% 15.79% 18.11% Nasdaq 1.10% 2.80% 20.17% 18.40% Last Rec'd Total# Security In At Current 04/01/98 9.015 INTC $80.417 $76.500 03/10/98 3.170 JNJ $67.087 $71.375 Last Rec'd Total# Security In At Value Change 04/01/98 9.015 INTC $724.94 $689.63 ($35.31) 03/10/98 3.170 JNJ $212.67 $226.26 $13.59 Base: $1400.00 Cash: $409.76** Total: $1325.65

The Drip Portfolio has been divided into 58.937 shares with an average purchase price of $23.754 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:

03/17/98: Sent $81 to buy/enroll in CPB.
03/17/98: Sent $70 to buy more JNJ.