Friday, November 26, 2010

Bought: 50 NWBI at 10.45, 50 RFPRZ at 24.49, 50 MRK at 34.78, 50 ASRVP @ 25/Sold 100 of 200 NQS at $14.55

The initial unemployment claims number declined by 34,000 to 407,000 on a seasonally adjusted basis for the week ending 11/20. ETA Press Release: Unemployment Insurance Weekly Claims Report This number is volatile around Thanksgiving.

The savings rate was at 5.7% in October, as Americans continued to repaid their balance sheets. BEA : Personal Saving Rate Personal income increased in October by .5% and disposable personal income increased by .04%. News Release: Personal Income and Outlays, October 2010

Orders for durable goods, excluding transportation, fell 2.7% in October (Economic, while the consensus estimate for that number was an increase of .6%.

Consumer spending rose .4% in October.

1. Added 50 MRK at 34.78 on Tuesday (see Disclaimer): When I bought 50 shares of Merck at 35.55 in early September, I intended to round the lot up to 100 shares, provided I could do so at a lower price.  The purchase on Tuesday of 50 shares at $34.78 did lower my average cost by a small amount. The dividend yield at my cost is over 4%. Merck recently declared its regular 38 cent quarterly dividend with a 12/13 ex date.  I am going to reinvest my dividends into additional shares.   

The news about Merck has been favorable since I last discussed this company. On 11/17, Merck reported at the annual meeting of the American Heart Association that its drug anacetrapib raised good cholesterol by 138 per cent while lowering LDL by 40 per cent. BusinessWeek Bloomberg Video - Promising results were found in the interim phase 2 study of ridaforolimus in the treatment endometrial caner, a development discussed in this Seeking Alpha article. That drug was developed by Ariad(ARIA), which I have owned in the past. Bought Another 100 ARIAD And Merck released results from a 9,000 patient study which showed that Vytorin "significantly reduced major vascular events in patients with chronic kidney disease". Merck News Item Merck also a trial involving  a patient's claim  that the use of Merck's drug Fosamax caused her severe jaw problems. 

2. BOUGHT 50 RFPRZ at $24.49 on Tuesday (see Disclaimer): I hold Regions Financial (RF) is less esteem than Zions. It is just impossible for me to say anything positive about the managers responsible for the huge losses suffered by this banking institution over the past two years. I am not able to see a ray of light for its shareholders.  I recently sold my 50 shares in RF at $6.57, having bought those shares at $3.47.  I have previously bought and sold RFPRZ at lower levels, satisfied to make a few bucks on the shares and to collect one quarterly interest payment. Bought 50 RFPRZ at 22.88  Sold RFPRZ at 23.46

RFPRZ is a typical trust preferred stock except in one important respect.  Unlike most bank TPs which permit deferrals of interest payments for no more than five years, Regions can defer payment for up to 10 years, though an alternative payment mechanism may become applicable after five years of deferral. The prospectus for this TP has standard stopper language that would prohibit Regions from paying a distribution on a junior security during any such deferral period. (see page S-40 Final Prospectus Supplement) In effect, this would mean that Regions would have to eliminate its meager one cent common share dividend and defer payment on the government's equity preferred stock before it could defer payment on RFPRZ.  

A junior bond is senior in priority to equity preferred stock.

In effect, this security is a junior bond issued by Regions Financial. The coupon is 8.875% on a $25 par value. By buying this security at $24.49, I raise the yield to me to slightly over 9%, paid in quarterly installments. RFPRZ is a trust preferred stock that represents an undivided beneficial interest in the assets of the trust, and those assets are a junior bond issued by Regions: " Each Trust Preferred Security represents an undivided beneficial interest in the assets of the Trust. The Trust will sell the Trust Preferred Securities to the public and its common securities to Regions. The Trust will use the proceeds from those sales to purchase $300,010,000 aggregate principal amount of 8.875% Junior Subordinated Notes due 2078 of Regions " Page S-1, Final Prospectus Supplement

This security is deservedly rated junk at Ba2 by Moody's and BB+ by S & P, according to (free site, registration required).

This is a link to the last filed FORM 10-Q.  RF has not earned any money for at least two years. FORM 10-K

I would classify myself as a weak holder of this security.

I would add that Regions has more than 15 billion in assets and will have to phase out the use of TPs as equity capital under the "financial reform" legislation recently passed by the Democrats. Trust Preferred Securities & Financial Reform  The same is true for Zions' TP.

3. Added 50 NWBI at $10.45 on Tuesday (Regional Bank Stocks' basket strategy)(see Disclaimer): Northwest Bancshares has not performed well, and is one of my losers in the regional bank basket. This last purchase of 50 shares was an average down from prior purchases  at $11.88, $11.47 and $11.10. I am reinvesting the dividend to buy more shares. I discussed its last earnings for the Q/E 9/2010 in Item # 2  NWBI.

This bank, based in Pennsylvania, is currently paying a quarterly dividend of 10 cents. At a total cost of $10.45, that equates to a dividend yield of 3.83%. The bank reported a tangible book value per share of $10.28 as of 9/30/2010. Press Release The latest capital ratios are set out at page 34 of the last 10q filing. As 9/30, the total capital to risk weighted asset ratio was 20.58% and the Tier 1 capital to risk weight assets was at 19.33% (6% well capitalized).  NWBI has 171 banking offices.

Possibly, some of the share price loss is due to the current P/E. At a price of $10.5 a share, and a consensus estimate of 66 cents for 2011, the forward P/E is 15.9. But that 66 cents is almost a 18% increase over the estimate of 56 cents for this year. NWBI is one of the larger positions of Scout Capital Management as disclosed in its latest Form 13 F SEC filing. NWBI recently authorized a stock repurchase program of up to 10% of its outstanding shares. Due to a regulatory consideration, the stock purchases could not commence prior to 12/18/2010.

The regional bank basket gained $791 on Wednesday or 1.75%.  NWBI is the third largest loser in that basket. First Niagara has recently moved slightly into the plus column after being a laggard since I started to purchase shares.  While FNFG is still trading below its 200 day moving average line, it has moved above its 50 day average:  First Niagara Financial Group I Stock Chart | FNFG 

4. Bought 50 of the TP ASRVP at $25 on Wednesday (see disclaimer): This is another TP viewed as too risky for the retirement accounts, and I could barely muster enough courage to buy 50 shares at its $25 par value. ASRVP is a typical trust preferred stock.  It is atypical in that the responsible bank is tiny. The common stock of AmeriServ Financial (ASRV) is currently hovering around $1.5, and has a market cap at the current price of less than 33 million. It is headquartered in Johnstown, Pennsylvania. I counted 19 branch offices at the bank's web site: AmeriServ Financial

The bank's TP has a $25 par value and a 8.45% coupon (originally issued under the name of USBancorp Capital Trust I, the bank changed its name to Ameriserve). As previously discussed ad nauseum, the bank forms a trust controlled by it, and that trust issues preferred stock to the public. The trust then uses the proceeds realized from the sale of preferred stock to buy a junior bond from the bank. The preferred stock represents a beneficial interest in that bond. The TP pays interest, not dividends.  

The underlying bond owned by the trust and the TP both mature at the same time, in this case with ASRVP on 6/30/2028. Payments may be deferred for up to five years but will accumulate and earn interest at the coupon rate (see page 9 of the prospectus There is at that same page in the prospectus what I would label a typical stopper provision, that is, the bank can not defer payments on this TP and make a distribution to the owner of a junior security.   

The bank is not paying a common dividend, but it is paying the government a government a dividend on 21 million in equity preferred stock. That stock is junior to the bond owned by the trust. If the government's payments are deferred, I would expect the bank to defer the payments on the junior bond too, but it is conceivable that would not happen. My thinking on that subject is that a bank would not likely stiff the government and continue to pay the private owners of a more senior TP. The important point from my perspective is that the bank would have to defer paying the government in order to defer paying interest on the bond owned by the trust. 

To find the SEC filings for this small bank, I had to use its old name as the search term, since the SEC's web site returned no results under its current name.  The bank did manage to earn a 2 profit per share for the Q/E 9/2010. Form 10 Q. I thought that the following statement contained in that report was significant and this representation made by the bank pushed me over the edge to make this chicken buy of 50 shares:

"The Parent Company had $17.3 million of cash, short-term investments, and securities at September 30, 2010, which was down $2.6 million from the year-end 2009 total.  We have elected to retain $14 million of the total $21 million in funds received from the CPP preferred stock at the Parent Company to provide us with greater liquidity and financial flexibility. ($7 million of the CPP funds were downstreamed to our subsidiary bank to help the Bank maintain compliance with our own internal capital guidelines.)  

Additionally, dividend payments from our subsidiaries can also provide ongoing cash to the Parent. At September 30, 2010, however, the subsidiary bank did not have any cash available for immediate dividends to the Parent under the applicable regulatory formulas because of the loss it incurred in 2009. The Bank will not provide any dividend support to the Parent Company in 2010. As such, the Parent Company will use its ample supply of cash and short term investments to continue to meet its trust preferred debt service requirements and preferred stock dividends which approximate $2.1 million annually"

Of course, this may change if the condition of the operating bank worsens, and the parent company has to shore it up. But I did note in that last 10 Q filing that the bank had established allowances for loan losses equal to 84% coverage of NPLs as of 9/30/2010.     

5. Sold 100 of the 200 NQS at $14.55 (see Disclaimer):  NQS is one of the leveraged municipal bond CEFs that I picked up a few days ago, at a time when the municipal bond market was undergoing a sharp correction which was magnified in the realm of leveraged municipal bond CEFs, as one would anticipate.  I mentioned buying 100 of this CEF in a post. Actually, I bought 200 shares and I reduced the position by 1/2 by selling 100 shares at $14.55 on Wednesday. Bought 100 NQS @ 13.7  The OG is fortunate to do as well as he does keeping up with all of this trading, being well past his prime.  

I  look at the WSJ pages every day on the closing net asset values for CEFs. When I was buying the municipal bond CEFs a few days ago, most of those funds had gone from selling at small premiums to discounts to NAV, and those discounts were expanding by significant amounts every day during the municipal bond selloff. I noticed on Tuesday night that the market price for NQS had moved from around a 5% discount when I purchase shares to a +3.94% premium to net asset value, as of 11/23, WSJ. That move was sufficient to cause me to trim my position, but I like the TF yield at the $13.7 cost enough to keep 100 shares for now. 

The remaining trades from Wednesday will be discussed in the next post. I sold two stock CEFs on Wednesday.