Friday, May 14, 2010

Bought 50 PJR Roth IRA at $23.61/Bought 50 WAIN at 8.72/Added 50 ORHPRA at $25/Bought 50 BACPRW at 22.62 in the ROTH/BDF Acquisition of HSF


This table reflects the stocks currently in the regional bank basket. The most important changes are the deletions of EWBC and WIBC, both recently sold at profits. SOLD 50 EWBC at $19.04 Sold 110 WIBC at 10.99 I realized a $651 profit after commissions on EWBC, with a total investment of $293. The sell of the Wilshire (WIBC) shares netted $331.31 net profit. The other sells and their profits realized include Wilmington Trust at a $224.38 profit (Sold 100 WL) and CVBF for around a $70 profit. A $25 loss on Synovus was incurred along with a small profit in PBIB which was subsequently repurchased after it was sold. I roughly figure that the realized gains so far have been around $1,275. I am not keeping track of how the dividends would add to the total return, but I am consciously adding names based in part on the dividend yield at my cost. The yield numbers shown in the table are at the last trade and not at my cost.

I attempted to adjust the numbers for Valley National to reflect the recent 5% stock dividend which will be paid soon. Where more than one purchase has been made, I use the weighted average cost and the date of the last transaction as the trade date. This is a basket strategy, which means that the focus is the total return of the entire basket and investments in each component in the basket will be kept small. Regional Bank Stocks


1. Added 50 ORHPRA at $25 (see Disclaimer): ORHPRA is a non-cumulative equity preferred stock issued by OdysseyRe. At the time of its original issuance, OdysseyRe was publicly traded and has since been acquired by the large Canadian insurance company, FAIRFAX FINANCIAL HOLDINGS LTD. This is a link to Fairfax's subsidiaries: Fairfax Financial Holdings Limited OdysseyRe is a reinsurance company, and this is a link to the S & P credit report which I found at the OdysseyRe web site: http://www.odysseyre.com .pdf. The equity preferred stock is rated BB according to that document (page 13) which predates the acquisition by Fairfax. This is the link to the OdysseyRe web site: OdysseyRe Home

OdysseyRe has two equity preferred stocks. Both are non-cumulative equity preferred stocks with no maturity dates. Both have a $25 par value. ORHPRA has a fixed coupon of 8.125%, whereas ORHPRB is a floater. I recently sold ORHPRB to buy a fixed coupon equity preferred stock issued by Renaissance Re. Sold 50 ORHPRB at 24 & Bought 50 RNRPRD AT 19.58 I had bought ORHBRB at $20.93.

My previous buy of ORHPRA was also at $25: Bought 50 ORHPRA. Yesterday's purchase brings me up to a 100 share round lot in the taxable account.

This is the link to the prospectus: e424b5

While these equity preferred stocks pay qualified dividends, the tax status of dividends to U.S. taxpayers is in a state of flux, and no one can say now what the rate will be in 2011. Dividend Tax Rate in 2011? The uncertainty is certainly not helpful to those trying to make intelligent decisions. TurboTax® - Summary of Federal Tax Law Changes for 2009-2017

I am personally content with a 8% interest or dividend payment, year in and year out in a retirement account. At that rate, the money doubles in about 9 years: Estimate Compound Interest. (at 11% a double occurs in 6.64 years) The main issue with these kind of securities is credit risk from my perspective, which includes the low priority and non-cumulative issues. A secondary consideration is the interest rate risk since I am satisfied with the 8.125% coupon. In a rising rate environment, I would prefer to own the floater, ORHPRB, and may transition back to it at some point. At the current prices, the protection of the float is not worth the current interest rate differential, at least to me.

2. Bought 50 BACPRW at 22.62 (see Disclaimer): I have been attempting over the past few weeks to increase the cash flow in my retirement accounts. As an example, I sold 100 GJL recently for a decent profit and bought 50 of JBI, which increased my current yield. Sold 100 GJL at $23.85/Bought 50 JBI at 24.81/ The buy yesterday of 50 BACPRW is a continuation of that effort to realize a higher cash flow.

BACPRW is a typical bank trust preferred issue. Bank of America forms a Delaware Trust that sells preferred stock to the public in order to raise funds to buy a junior bond from BAC. The preferred stock represents an undivided beneficial interest in that bond. It is not a traditional (equity) preferred stock. The distributions payable to the owner of a trust preferred are classified as interest, rather than dividends, which is one reason for me to place this kind of issue in a retirement account. The other reason involves a separate tax issue related to a deferral of cumulative interest payments.

As with other TP issues, interest may be deferred for up to five years, and the deferred distributions accrue interest on the unpaid amount at the coupon rate. No deferral is legally permitted for as long as Bank of America is paying a cash dividend on a junior security. The junior securities to a TP owner would be equity preferred stock and common stock. This is called a stopper provision.

Bank of America has several TP issues, and links to the prospectuses can be found at QuantumOnline (free site-registration required).

BACPRW matures on 12/15/2031. However, the bond may extended to 2050 provided certain conditions are met. (S-25) Some of those conditions include an investment grade rating and no arrearage in interest payments. I doubt that I will own this bond in 2031 so this possible extension of the maturity date is not overly troubling to me.

The coupon is 7%. This is the link to the prospectus: www.sec.gov The option to defer payments is discussed at page S-24. The stopper provision is typical and can be found at page 29, an attachment to the prospectus.

Bank of America provides at its web site the current ratings of its securities: Bank of America | Investor Relations | Fixed Income Investor Relations Its trust preferred issues are rated junk by S & P and Fitch. Moody's has them at Baa3, which is barely investment grade.

The yield on BACPRW at a total cost of $22.62 is around 7.74%.

3. Did the Banks Dupe Poor Defenseless Moody's and S & P- Cuomo Wants to Know: The NYT reported yesterday that the attorney general of NY, Andrew Cuomo, has launched an investigation to determine whether several large banks provided misleading information to the ratings agencies to dupe them into providing inflated grades on certain mortgage produces. Now, how exactly is that possible in any material sense? Did the investment banks provide the rating agencies with false data about the performance of the mortgages? Are the rating agencies supposed to be independent professionals capable of analysing the securities being rated and possessing an abundance of material information relevant to their ratings? Sure, the banks took advantage of the flawed models being used by the rating agencies but it is not a crime for one person to be smarter than another. The NYT reported last month that the rating agencies made their models publicly available. But it would not be a revelation to hear Cuomo responding like a politician to the news of the day.

4. Sprint (own DHM and GJD only): The common stock of Sprint rose almost 8% yesterday after Raymond James upgraded the stock to outperform and Wal Mart agreed to carry Sprint's new prepaid wireless plan called "Common Sense". MarketWatch Common Cents Mobile

5. HSF Will Be Merged into BDF: I neglected to mention in the post from Thursday that HSF will probably be merged into another CEF called Rivus Bond Fund fairly soon: Announcement of Reorganization of The Hartford Income Shares Fund, Inc. into Rivus Bond Fund BDF will be the surviving CEF and the shareholders of HSF will receive BDF shares that have the aggregate net asset value equal to the aggregate net asset value of the HSF shares. Rivus is selling at a greater discount to its NAV than HSF. The BDF discount was 8.98% as of 5/12/2010. The dividend yield of the two funds are relatively close. The dividends for BDF are paid quarterly however. Both funds would fall under the investment grade "BBB" average credit rating category. This is a link to the Rivus Bond fund site: Cutwater Asset Management - Rivus Bond Fund This is a link to the latest SEC filed report for the Q/E 12/31/2009: www.sec.gov

The prospectus for the merger states that it is anticipated to be a tax free reorganization: "It is anticipated that the Reorganization will qualify for Federal income tax purposes as a tax-free reorganization under Section 368 of the Internal Revenue Code. Accordingly, pursuant to this treatment, neither the Acquired Fund nor the Acquiring Fund, nor the shareholders of either Fund are expected to recognize any gain or loss for Federal income tax purposes from the transaction contemplated by the Reorganization Plan." www.sec.gov/ (question 7). The answer to question 9 explains how many shares of BDF will be received for the HSF shares.

RB just said there is a reason the NERD "neglected" to mention this tidbit in yesterday's post. ADMIT IT NERD!

6. Bought 50 PJR at $23.61 in Roth (See Disclaimer): This TC purchase leaves me with less than a $1000 in the Roth and is the replacement for the 50 of GJD sold on Wednesday. The underlying security is a senior bond from Unum, with a 6.75% coupon, that matures in 2028. The TC has a higher coupon at 7.4%. Moody's recently upgraded Unum senior debt to investment grade. WSJ.com The relevant QuantumOnline page shows investment grade ratings. Unum recently reported better than expected results for the first quarter. Par value is $25 so the current yield at a total cost of $23.61 would be around 7.84%. This is a link to the prospectus: www.sec.gov

I previously bought this trust certificate in the taxable account last July for $16.72. I may sell those shares after it turns into a long term capital gain. I also bought 50 shares of PJR in the regular IRA last October at $20.70. When I made my initial purchase, this TC with a senior bond from Unum was yielding more than the TCs with a junior bond that matured 10 years later. The pricing yesterday was more rational, in that a TC with a junior bond was being priced to yield about .75% more than PJR. I am referring to the TCs KSA and KCC, both containing a junior bond maturing in 2038 from Provident which subsequently merged with Unum to form Unum Provident, now Unum Group (UNM): Reuters.com

The yield to maturity at a total cost of $23.61 would be about 8.32%: Morningstar Bond Calculator: Yield to Maturity, Returns, Taxable and Municipal Bonds The yield to maturity at 16.72, the price of my first buy back in July, is about 12.41%.

7. BOUGHT 50 WAIN AT 8.72 (Regional Bank Stocks strategy)(See Disclaimer): The bank has 12 offices in the Boston metropolitan area. Wainwright Bank :: About Us - Locations

The bank did accept 22 million in TARP funds and repaid the government in November 2009:www.wainwrightbank.com .pdf

The bank refers to itself as "country’s leading socially progressive bank." LB just said, "Sounds like a bunch of liberals". RB, the only liberal here at HQ, said it wanted to buy a 10,000 shares of WAIN. What happened to the Old Geezer's famous saying, RB thought to itself, what was it again, "What the Heck, Buy a 1,000" . The OG replied that this was just a saying, no one should take the OG's famous sayings seriously. LB does not take the OG seriously. RB helpfully added that how was Headknocker going to acquire Canada, all of it, with these kind of purchases?

The bank " has committed over $700 million in loans to socially responsible development projects including affordable housing, environmental protection, HIV/AIDS services, homeless shelters, immigration services and more. The Bank was named the “ultimate high-purpose company” in a recently published book by award-winning author, Christine Arena, entitled “The High-Purpose Company: The Truly Responsible (and Highly Profitable) Firms That Are Changing Business Now”." www.wainwrightbank.com PR-1stqtr2010.pdf The OG being one of the few True Conservatives remaining in the U.S. suspects that the foregoing appears to be some kind of liberal agenda. The LB helpfully added that put some stuffing in that crumbling OG body and then offer the entire balding overweight structure to the Smithsonian as a relic to put next to the dinosaur exhibit, with a sign saying "The Last True Conservative in America". Or better yet, put the stuffed OG in that creation museum in Kentucky next to Adam and Eve walking with the dinosaurs. Kentucky's Creation Museum | vanityfair.com Creation Museum NYT

This bank apparently does not file reports with the SEC. Instead, reports are filed with the FDIC using SEC forms. The 2010 1st quarter report, available at the bank's web site, can be found atwww.wainwrightbank.com/ 10Q-1stQTR2010.pdf The bank earned 25 cents per diluted share for the 1st quarter up from 16 cents in the year ago quarter. The total capital to risk weighted assets was 12.1% as of 3/31/2010 (page 27). Net interest margin was 3.46%. There was a slight decrease in loans more than 30 days past due to 1.21% of total loans.

The current dividend rate is 8 cents per quarter, which give the stock about a 3.75% yield.

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