Thursday, April 22, 2010

Bought 50 MBVT at 22.9/GS/Bought 50 RNRPRB at 24.24/Earnings: KEY WASH NRIM HBAN NWBI

I added a name yesterday to the regional bank strategy. I may not post this updated table again until I have several changes in it. You have to click the table to read it. Only a few of my readers are interested in this particular basket strategy.

I figured out that paying ClusterMaps a few bucks would stop the ads that appear in the event anyone clicks on the map to the right.

Andy wrote and is the lead singer on three of the songs on the new Infamous Stringduster album, which can be downloaded from Itunes or purchased at most retailers including Things That Fly: Infamous Stringdusters: Music. His songs on the album, where he is also the lead vocalist, are:

1. You Can't Stop The Changes

5. Those Who've Gone On

10. Love One Another

RB says that Andy had not been held prisoner by an insufferable NERD like our LB and is a kindred spirit. Set the RB FREE! Maybe the RB needs to start a petition drive to end its unjust imprisonment for over 58 years now. LB just said that if it sees that petition, it will eat it and squash the RB like some varmint. No. More like one of those cockroaches. In fact, the LB is going to show that it means business by changing the profile picture to the one most feared by the RB. The RB replied "Go All In You Insufferable Nerd, Just Like the Great RB Said Back in March 2009". Even the VIX Asset Allocation Model, one of the LB's stinking models, has flashed a green signal, the RB added with evident satisfaction of yet another argument won against the originator of rule plagues-case closed. LB replied that the RB has never understood the Vix Asset Allocation Model, and that model has not yet flashed a green light, contrary to the RB's babble. And, LB noted that the Barrons technical analyst claims the scales have tilted in favor of the sellers. The OG was heard to say, please just a moment of peace and quiet.

1. Bought 50 Merchants Bancshares (MBVT) at $22.9 (Regional Bank Stocks Strategy-Category 1) (See Disclaimer): Merchants is a state bank with 34 branches in Vermont.

This stock has very light volume and mostly a very large bid/ask spread. Consequently, I did not place my limit order at Fidelity.

Merchants did not participate in TARP:

Both the holding company Merchants Bancshares and Merchants Bank exceed the capital ratios for well capitalized banks by a comfortable margin. As of 12/31/2009, the holding company has a total risk based capital ratio of 14.16% and the well capitalized percentage is 10%. (see page 75: 2009 Annual Report) The holding companies tier 1 risk based capital ratio is 13.34% and the Tier 1 leverage capital ratio is 7.67. Merchant's Bank had a Tier 1 risk based capital ratio of 12.9%, and well capitalized is 6%.

The bank remained profitable during the Near Depression period. The bank had an E.P.S. of $1.77 in 2007, $1.96 in 2008 and $2.04 in 2009 (see page 47 2009 Annual Report). The one analyst that has an earnings estimates predicts an E.P.S. of $2.13 in 2010 and $2.20 in 2011, so not much growth. This would be the main knock against this stock. Still, the dividend is well covered, and the bank has room for dividend increases. However, looking at the dividend history, there has been no raises since the $1.12 annual rate was established in 2006. The dividend was increased in stages from 65 cents in 2000 to $1.08 in 2004 and then went into more of a maintenance mode.

The allowance for loan losses as a percentage of nonperforming loans is 76%. The allowance for loan losses to total loans is 1.19% (see page 38). Net interest margin was 3.8%.

The bank just declared its regular quarterly dividend of 28 cents per share. At an annual rate of $1.12, the yield at a total cost of $22.9 would be about 4.89%. Merchants Bancshares Inc, MBVT This one was bought in a satellite account.

The LB wants everyone to know that it will go on strike if requested to read another earnings release from SNV.

2. New York Community Bancorp (NYB)(own-Regional Bank Strategy): New York Community Bancorp reported that its GAAP earnings increased 40.2% to 124.4 million, year-over-year, or 29 cents per diluted share. The consensus estimate was for 30 cents. Net interest margin was 3.41%, up from 2.89% in the year ago quarter. The ratio of tangible equity to tangible asset rose 10 basis points to 7.23% from 12/31/2009. Stockholder equity rose 54.4 million during the quarter. The Board declared its regular 25 cent per share dividend. Based on my cost per share that is around $11, my dividend yield is close to 9%. NYB has performed exceptionally well since my purchases a few months ago: Added 50 NYB at $10.57 50 NYB at 10.9 50 NYB at $11 Bought 50 NYB at $11.3

3. Goldman's Skin in the Game Argument & The Bombshell About the Pellegrini Testimony (own GS bonds only in Trust Certificate Form-JBK, PYT, GYB, & PJI): An article in the NYT yesterday addresses one of the material issues where I previously did not know the answer. If the statements in the article are true, GS was an involuntary owner of a residual slice in Abacus. ACA Management apparently withdrew its willingness to buy the residual part that ultimately caused GS' losses. Then, the Fabulous FAB tried to unload that slice on other buyers. This obviously diminishes the value of GS's argument about having skin in the game. I would withhold judgment on whether it renders that argument useless and even counter-productive. There is another statement that GS apparently may have turned down some offers for that Abacus slice when one or more potential buyers were unwilling to pay Goldman's price. If GS turned down meaningfully high offers, this would help to restore the skin in the game argument.

I thought that the government had overplayed its hand in its suit against Goldman, and its case appeared to be weak both factually and legally: Item # 2 Goldman's Defense and Possible Penalties in the SEC Case & Item # 3 GS After reading reports yesterday about what Pellegrini told the government, I would question the merits of the SEC in bringing the case even more strongly. Pelligrini is alleged to have told ACA that Paulson intended to short the Abacus portfolio, a statement that directly undermines the SEC's case. WSJ CNBC obtained a transcript of his testimony where he clearing testified that he told ACA of Paulson's intentions. The person at ACA who was allegedly told this information has been identified as Laura Schwartz, no longer with the company, who hung up the phone on a reporter making an inquiry: Ms. Schwartz was a former Merrill Lynch banker who had worked in a division of that company originating subprime loans. According to a GS defense submission to the SEC, she worked on a transaction in December 2006 in which the hedge fund Magnetar, a hedge fund that participated in the equity tranche of a CDO also took short positions. So, even if she had been mislead into believing Paulson was taking an equity position, she would have known according to GS documents, based on prior experience, that an equity hedge fund investor would also take short positions.

According to CNBC Pellegrini also testified that there was no equity stake in the Abacus deal. This undermines the SEC's contention that ACA was misled to believe Paulson was buying the equity stake. News Headlines

The SEC was in effect presenting a novel legal theory. The SEC is not complaining that the professional investors were misled about the securities in Abacus, or that the parties in the transaction were unable to evaluate or assess their potential value. Instead, the SEC is trying to claim that the parties were misled about the selection process for the securities and Paulson's role therein. This is already pretty weak. Now, we find out that there is at best a very mushy contradictory factual case underlying the novel legal theory.

Goldman's defense document submitted to the SEC in September 2009 by Sullivan and Cromwell, a very large NYC based firm, is publicly available for anyone to review:

There was an unusual amount of detail in the Complaint that is normally not seen. This leads me to believe that the government unloaded most of what it had in the Complaint, held nothing of significance back, and wanted to play to the mob, hoping for a public lynching before anyone started to scratch the surface.

I would say that the evidence is mounting that the SEC's complaint was filed in bad faith and for ulterior motives.

4. Northwest Banchshares (own-Regional Bank Strategy): Northwest Bancshares reported earnings of 12 cents per share in the 1st quarter. The Board declared a regular dividend of 10 cents per share. The net interest margin was 3.32%. Nonperforming assets to total assets was 1.72%. Tangible book value was $10.16. All figures are as of 3/31/2010. The expectation was for 9 cents. As discussed previously, this bank underwent a demutualization process recently, raising a lot of cash and issuing a large number of shares. It will just take time for it to deploy the cash into income producing loans. The bank has 171 offices.

5. Bought 50 RNRPRB at $24.24 (See Disclaimer): As a result of several bond calls, I have a surplus of funds sitting idle now earning nothing in a money market account that are targeted for reinvestment in bonds or bond like investments such as preferred stocks. Given the long Jihad by the Fed against savers, the pickings are mighty slim now. I am generally reluctant to buy non-cumulative fixed coupon equity preferred stocks, viewing their numerous negatives to outweigh their few positive features. But, beggars can not be too picky.

RenaissanceRe Holdings (RNR) is a large reinsurance firm that pays a small common stock dividend. Analysts currently estimate E.P.S. of $6.55 in 2010 and $8.28 in 2011: RNR: Analyst Estimates for RenaissanceRe Holdings Ltd. The Annual Report shows earnings fluctuate widely from year to year, due in main part to the presence or absence of large catastrophes. ANNUAL REPORT TO SECURITY HOLDERS A five year stock chart shows a relatively stable company that held its value well during the Near Depression period: RenaissanceRe Holdings Ltd. Com Share Price Chart

There are many reasons to dislike equity preferred stocks that have fixed coupons. I have referred to this type of security in the past as a monstrosity. It combines some of the worst features of a bond and a stock without many of the beneficial characteristics. For one, the security is part of the firm's equity but the owner of equity preferred stock really has no interest in the business. Unlike a bond, the traditional preferred stock has no maturity and is perpetual like its common stock relative. The priority is between common stock and all bonds. An equity preferred stock may have cumulative or non-cumulative dividends. Cumulative is always the better choice. RNRPRB is cumulative, which is a point in its favor.

The only real protection that the owner of RNRPRB has for continued payment of the dividend, which is all the preferred shareholder has in the last analysis, is a dividend payment on a more junior security. Once a cash common share dividend is eliminated, there is no legal protection on continued payment of the traditional preferred dividend. So, there is a lot of negatives with these securities. Most of my investments in them are minor for that reason, and are mostly limited to equity preferred floating rate securities that pay the greater of a guaranteed rate or a float over a short term rate like the 3 month LIBOR or 3 month Treasury bill. Advantages and Disadvantages of Equity Preferred Floating Rate Securities Unfortunately, I view the prices of those securities to be too high now for further investment. (See also: REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages Embracing Volatility as A Risk Management Tool In the Sub-Asset Class of Equity Preferred Stock Managing Risk for Each Security in the Asset allocation)

There are a few reasons for adding the fixed coupon equity preferred in small amounts. The main reason is the after tax yield issue. According to QuantumOnline, all of the RNR traditional preferred stocks pay qualified dividends. This caps my effective tax rate, at least until the Democrats change it, at 15%. This gives me a better after tax yield than a bond that has the same yield.

Unlike a lot of traditional preferred stocks now, the RNR issues are rated investment grade according to quantum at Baa3 by Moody's and BBB+ by S & P.

There are three traditional preferred stocks issued by RNR:

RNRPRB Coupon 7.3% Prospectus Quote RNR.PRB
RNRPRC Coupon 6.08%
RNRPRD Coupon 6.6% Final Prospectus Supplement

The dividends are paid quarterly. The yield at a total cost of $24.24 is about 7.53%. Yesterday, the yields on the three preferred stocks were close, but RNRPRB had a slight advantage over the other two. Yield at the purchase price is the only relevant consideration in choosing among the three available RNR preferred stocks. I do not view the coupon to be relevant, but only the yield at my potential cost.

On this kind of buy, I do not not expect much, if any, capital appreciation. Instead, I would be pleased to receive a few dividends and to unload the shares for a $1 profit.

6. Huntington Bancshares & KeyCorp (own both-Regional Bank Stocks strategy-Category 1): Huntington Bancshares (HBAN) surged over 13% in price yesterday after reporting a profit in its first quarter. The pace of charge-offs fell to the lowest level since the 3rd quarter of 2008. The results included a tax benefit of 38.2 million or five cents per share. The net interest margin increased to 3.47% from 3.19% as of 12/31/2009. Bought 50 HBAN at$4.27 /Added 40 to LT HBAN at 3.7

KeyCorp Reports reported a lower loss of 11 cents, beating expectations by 19 cents.Bought 50 KEY at 5.88-Lottery Ticket

7. Northrim Bancorp (NRIM)(own Regional Bank Strategy-CAT 2): Northrim BanCorp reported earnings of 1.9 million in the 1st quarter or 29 cents per share. This was 1 cent better than the consensus estimate from two analysts. The Tier 1 capital/risk adjusted ratio was 14.43%. The total capital to risk adjusted assets was 15.57%. And the net interest margin was 5.34%, the highest that I have seen in the reports for the 1st quarter reviewed to date. The efficiency ratio was 71.21%. Tangible book value increased to $16.2, up from $15.3 a year earlier. Nonperforming loans were 2.41% of total loans. Net charge-offs in the 1st quarter were .27% of annualized of average loans. Commercial real estate loans accounted for 46% of the loan portfolio. 85% of the loans have been made to customers in the Anchorage, Alaska area. The last two tidbits will keep my position in NRIM to 50 shares even though it has favorable ratios and a high net interest margin.

8. Washington Trust (WASH) (own Regional Bank Strategy-CAT 2): Washington Trust beat estimates by 2 cents, reporting an E.P.S. of 32 cents compared to 17 cents in the year ago quarter. The Board declared the regular 21 cent per share dividend. Tangible book value was at $11.99 per share. The capital ratios increased from 12/31/2009. As of 3/31/2010, the tier 1 risk-based capital ratio was 11.24%; the total risk-based capital ratio was 12.5%; and the tangible equity to tangible asset ratio was at 6.81%. Bought 100 WASH at $15.26


  1. I have been following your Regional Bank strategy. Wanted to let you know that another likes to follow what you are doing. I can not keep up with 30 stocks so I have four with between 750 and 1500 shares. I also have a limit order for a local bank CFFI but it seems it may be getting away from me with out filling. Your RB may be interested in another blog I keep up with
    It may help the RB and its attempt to help the OG take over Canada.

  2. Another note about your problems with Knight trading. I tried to sell 75 shares of WFC prL with a limit order of 990. 63 shares sold at 991 leaving me with 12 shares. The stock showed the high for the day of 886 so I do not know how or why my 62 shares sold at the higher price but I'm not complaining. Thanks again for writing this blog.

  3. What are your thoughts on tendering shares when they're called - do you have a hard and fast rule, or does it depend on the issue? I just got a notice that my holding in NW PRC is the target of a tender offer. I bought at $19.15 they are offering $21.25 on a face value of $25. I'm not sure what to do.

  4. Yellowmater: I have noticed that odd lot fills will invariably fail to show up in the high/low number.

    I will take a look at CFFI. I am not familiar with that bank. In fact, I just drew a blank on whether or not I own a bank with operations in Virginia, one of the hazards of owning too many and having far less functioning brain cells than the LB claims to have.

    OzPala: I am not familiar with National Westminister, other than I believe that it is part of the Royal Bank of Scotland, and I have stayed away from RBS securities. I do not have any exposure to European bank equity preferred issues, and have limited by investments to ING and Aegon hybrids only. I have a negative opinion on European banks in general.

    I have no hard and fast rule about tendering, and each case is evaluated on its own merits.

    For example, I turned down two offers from Zions to buy ZBPRA. Based on my analysis at the time, I believed the bank was not offering a fair price for that security. And it turned out that I was correct in that assessment, with that security currently trading around $6 higher. Zions successfully bought back shares in ZBPRA on the cheap. I still own all of mine.

    If I had not sold PJS I would have tendered those shares at their par value of $25.

    I checked quantumonline and noted that NWPRC was an equity preferred issue and was non-cumulative. It is firmly in junk territory at B3 by Moody's and B by S & P.