Thursday, January 27, 2011

Bought 50 BMLPRG at 16.04/Bought 30 KEY at 8.75/ Sold 100 TOBC at 23.12/EXC NYB EBTC FFIC UBCP

Our new Head Trader, the Old Geezer, will be not be discussing many of the trades made by him and is falling way behind in describing material relevant to the advancement of our Great Leader's capital position.   There were several good bank earnings released after the bell yesterday which will be discussed in tomorrow's post.  I have 39 names in my regional bank basket now.

Another customer sent me Fidelity's response to his email complaining about their growing list of exchange traded bonds and preferred stocks that are off limits to their investors.   That response was different from the one given to me.  Fidelity noted that it does have a no buy list but the customer representative had no idea what securities were presently on it. If that customer wanted to know what was barred, he could call Fidelity and maybe someone could tell him about a particular security. Of course, that call is not necessary, just try to trade a prohibited security like HBAPRF, and you will find out soon enough it is on the no buy list when that annoying red box message appears. 

Of course, that customer inquired why HBAPRF was on the list and not HBAPRD and HBAPRG.  And there was no reply to that question. Why? Only a fool would try to justify one being added and not the others.   Fidelity went on to explain to that customer the reasons why securities are placed on its no buy list.  Fidelity did not give as a reason that the persons making the decisions are both arrogant and ignorant, a dangerous combination normally associated with the Masters of Disaster at the Wall Street firms.

Instead Fidelity mentioned trading volume.  Well, hundreds of common stocks are thinly traded and I could buy them today at Fidelity. Fixed coupon trust certificates, a very profitable area for me since the summer of 2008, are notorious for being thinly traded with frequent large bid/ask spreads.  I would not be surprised to find those securities added to the no buy list, since one of them, JBK, is already on it.   On the day I was denied the option of buying HBAPRF, an investment grade preferred stock, it traded over 300,000 shares with a narrow bid/ask spread, so maybe that reason did not apply to that easily understood security.

Another reason given was the ease that their customers could find information.  I had to think about that one moment.  And RB asked, "does Fidelity believe their customers actually go to the SEC web site to look for information before buying anything?" Really?  Of course, like any security, information about the securities on the no buy list is available to all customers who want to avail themselves of the opportunity to learn before buying, a distinct minority at any online firm without question.

And information about all of the securities that are currently barred can be found at websites like Quantumonline, certainly outside the limited knowledge realm of your typical Fidelity management person, but well known to investors who actually buy exchange traded bonds. Many of the securities on the no buy list are discussed in blogs, mine discusses many of them ad nauseum.  Does any reader of this blog want to know more about GYB, how about another page on that one?  I took a snapshot of the trading profit associated with just two small synthetic floater positions in my regular IRA, GYB and GJN, both now on the no buy list:

The gains on other fixed coupon trust certificates, which are also thinly traded, are far more significant than the profits booked on just the numerous synthetic floater transactions which were good percentage gains as shown in just those two trades.

I have used the securities that are now on the no buy list to conservatively manage my IRA accounts.  The purchase of securities that Fidelity deems inappropriate now is one of the main reasons those accounts are up close to 40% since October 2007.  Several thinly traded REIT preferred stocks also aided that result, doubling or more in value.   I have detailed the purchase of the synthetic floaters at great length since I started to purchase them in the Spring of 2009, and I am sure that I have doubled my money on this grouping of BONDS. 

I have moved my ROTH IRA form Fidelity to a firm that is not currently treating their customers like children. The Roth IRA was the account most impacted by the ban on the synthetic floaters and the principal protected senior notes.   In addition, I moved about 25 grand out of Fidelity when it first started applying its no buy list to principal protected notes and synthetic floaters.  I have decided to move more cash out of Fidelity to another broker, and punish Fidelity about $5,000 a year in lost commissions for as long as they persist in interfering for no good reason with what I view as appropriate investment strategies in an IRA.  After all I have been successfully managing money for a very long time, and I am, without any doubt, in a far better position to judge what is appropriate for me than some arrogant management person at Fidelity who in reality knows squat.

Just a reminder.  The Old Geezer, who is writing this blog now, is a far mellower version of Headknocker.  So, RB said "chill out, let's do some Yoga".

1. Bought 50 BMLPRG at 16.04 on Tuesday (see disclaimer):  Fidelity graciously allowed me to buy this equity preferred floater.  Before doing so, I tallied up my trading profits from 2009-2010 in the non-cumulative BAC equity preferred floaters with guarantees.  I had never owned much at one time, but I had realized gains in BMLPRH, BMLPRJ, BMLPRG and BACPRE of $717.30 plus dividend payments. Of that amount the largest gains have come from 100 shares of BMLPRH:

I now have the largest position in terms of dollars in this series of BAC floaters, and that position is still small with 100 shares of BMLPRL, 50 shares of BMLPRH and 50 shares of BMLPRG.  To take that size of a position, however, I had to first determine how much I had banked in these functionally equivalent securities.  All of them are non-cumulative, perpetual obligations of Bank of America and have $25 par values.  The securities with the prefix "BML" were originally issued by Merrill Lynch:

BMLPRG 3% or .75% over 3 month LIBOR Prospectus Supplement
BMLPRJ 4% or .75% over 3 month LIBOR Final Prospectus Supplement
BMLPRH 3% or .65% over 3 month LIBOR Final Prospectus Supplement
BMLPRL 4% or .50% over 3 month LIBOR Term Sheet
BACPRE 4% or .35% over 3 month LIBOR Bank of America Corporation

 I previously owned 50 shares of BMLPRG in 2009 for about a week and sold them for a $166.48 profit:

This is the pricing for these five functionally equivalent securities as of Tuesday's close, with the current yields calculated by Marketwatch based on their respective guarantees:

BMLPRG $16.14   4.75%
BMLPRJ  $18.67   5.48%
BMLPRH $16.02   4.79%
BMLPRL $18.35   5.57%
BACPRE  $18.75   5.45%

First, I do not believe the .04% higher current yield of BMLPRH compared to BMLPRG justifies preferring the "H" series over the "G" given the .1% better LIBOR float of the "G" series.  So if I had to choose on Tuesday between those two floaters, based on the prevailing prices last Tuesday, I would go with the "G" but the difference is not that significant either way.

Second, although I own the "L" series, it was an inferior buy to the "J" series on Tuesday. The current yield was about the same but long term the "J" series has a .25% better LIBOR float.  So in that case, I would go with the slightly lower current yield in favor of the long term Libor float advantage.

So why not go with the three floaters that have the 4% guarantee and around a .75 to .8% higher yield.  One reason is that I already own 100 of BMLPRL.  Another is the lower cost for either the "H" or "G" series, which will make a difference when their LIBOR rates return to more normal levels.

The way that I calculate the relative merits is to invest hypothetically the same sum in the floaters.  I will run a few calculations assuming a $1000 purchase.

BMLPRJ  $18.67 Price = 54 shares FOR $1000
BMLPRG $16.14 = 62 shares FOR $1000

Annual Income Per Year at

BMLPRJ:  $54
BMLPRG: $46.50

BMLPRJ:  $54  (float has not kicked in)
BMLPRG: $58.13    (no longer at guarantee, but at 3.75%)

5% LIBOR: (Both .75% spreads now activated)
BMLPRJ:  $77.63
BMLRRG: $89.12

BMLPRJ: $118.12
BMLPRG: $135.63

The advantage for BMLPRG is due to the larger number of shares purchased with $1,000 and the earlier activation of the float.  For the investor to be better off long term with BMLPRJ, you would need a prolonged period at the guarantees.   While we may have several more years of low short rates, as Bill Gross claimed in the Barrons Roundtable Part II, I do not agree with that forecast, but I am swinging both ways by owning 100 of the 4% guarantee BMLPRL and 50 each of the two 3% guarantees.  

2. Bought 30 shares of KeyCorp at 8.75 on Tuesday (KEY)(LOTTERY TICKET strategy)(see Disclaimer):  I previously bought and sold KEY:     Bought 50 KEY at $5.88-Lottery Ticket Sold KEY at 8.12  I decided to re-establish a position after  KEY announced better than expected net income of 292 million from continuing operations or 33 cents per share.   One drawback is that KEY has yet to pay back the government, and owes 2.5 billion in TARP funds.  Another future problem is that KEY has a lot of trust preferred issues providing it with Tier 1 equity capital. {See Item # 1  KEY at 8.12  and Trust Preferred Securities & Financial Reform}  KEY will no longer be able to rely on those TPs to provide it with TIER 1 equity in a few years. So, it would be reasonable to expect another large share issuance down the road.

For this LT, I am not going to pay much, if any, attention to it for the next ten years, except to note whether the bank receives an acquisition offer.  Like many large regional banks, KEY was run into the ground by management, as the stock price fell from $39.50 in early 2007 to $5.36 in early March 2009: KeyCorp Common Stock Stock Chart | KEY  Long time shareholders saw the stock price lose all of its appreciation since 1990.  To add insult to injury, the dividend was cut to 1 cent a quarter, which is the current rate, from $1.46 annually.  It is questionable whether KEY will return to that dividend level or, even it does, whether I will still be alive to witness it.   But at a $1.46 annually, the yield at a total cost of $8.75 would be about 16.68%.   And, the price of the stock would undoubtedly be much higher in that scenario than $8.75.

More than likely, I would anticipate that KEY will not return to a $25 stock and a $1 annual dividend within the next seven or eight years.  Maybe there is a decent or reasonable chance of that happening in 10 years, which is sufficient to justify a less than $300 expenditure of HK's capital coupled with the initiation of my forget about it mode of investing.

KEY closed at $8.89 yesterday. A discussion of Key's earnings report for the 4th quarter can be found in this article from Seeking Alpha.

3.  New York Community Bancorp (NYB)(own: Regional Bank Stocks' basket strategy):   NYB reported GAAP net income of 149.8 million dollars for the 4th quarter or 34 cents per share.  Diluted "cash" E.P.S. was reported at 37 cents per share and "diluted operating cash" E.P.S. was 32 cents.  Apparently, the last number is what is comparable to the consensus estimate.  The consensus estimate was for 32 cents.  

The operating efficiency ratio improved to 35.6%.   The net interest margin increased 25 basis points over the linked quarter to 3.61%. NPLs to total loans stood at 2.23% at the end of the quarter.   

Some of the prior discussions about NYB can be found in the following posts:  Bought 50 NYB at $11.3 50 NYB at 10.9 50 NYB at $11  Added 50 NYB at $10.57  NYB closed at $18.15 in yesterday's trading, down 2.84%. 

NYB yields about 5.35% at its current price, and close to 9% at my average cost per share. 

4.  Exelon (own: core electric utility strategy):  EXC reported GAAP earnings of 79 cents for the 4th quarter.  The adjusted E.P.S. which excludes some items discussed by EXC in its press release, was 96 cents. Depending on the service providing the consensus estimate, this beat expectations by eight 4 cents or 6 cents.  Exelon  introduced guidance for 2011 E.P.S. at between $3.9 to $4.2.  Exelon also declared its regular quarterly dividend of 52.5 cents.  

Exelon closed at $43.03 yesterday, down 17 cents.  Morningstar has a five star rating on the stock with a fair value estimate of $67.

5.  Enterprise Bancorp Inc (EBTC)(Own: Regional Bank Stocks's basket strategy):  Enterprise, a small Massachusetts based bank, reported net income for the 4th quarter of 2.5 million or 26 cents, down from 32 cents in the year ago quarter.  The number of diluted shares increased to 9,280,014 for the Q/E 12/2010 from 9.221.257 at the end of year ago quarter.  Still, I was not pleased with this result.  Net income declined from 2.785 million to 2.422 million. 

There has been some acquisition activity over the past several months, where smaller banks with operations in Massachusetts have been acquired by larger institutions.  I was fortunate to own one them,Wainwright Bank, and received close to a 100% pop in those shares.  Sold 50 Wain at $18.7-Being Acquired  Bought 50 WAIN at 8.72  Recently, People's United Financial  (PBCT) made an offer to acquire Danvers Bancorp, which caused about a 28% pop in DNBK.  This is the second recent acquisition by PBCT of a small bank with branches in Massachusetts, the only being LSB Corporation which has since been absorbed by PBCT.    

I have harvested a small gain on my highest cost EBTC shares:  Bought 50 EBTC at 11.75 Sold   50 EBTC @ 13.  I still own 100 shares as part of my regional bank basket that has close to 50 different banks in it: Added 50 EBTC at 10.33  Bought 50 EBTC at 11.27  It is a close call whether to keep those shares given the unrealized profit and this last earnings report.  The net interest margin is good, compared to other banks, at 4.41%.  As of 12/31/2010, NPAs to total assets stood at 1.51%, which is low, and the total capital ratio was at 11.44% with no TARP money.  The dividend is close to 3% at the current price,  and higher at my significantly lower cost basis. 

I wonder why Fidelity has not put EBTC on its no buy list given its newly found criteria for excluding securities from customer purchases.   When I looked at EBTC yesterday afternoon, 500 shares had traded, the bid was at $14.5 and the ask was $14.97. Near the end of the day, someone bought a 100 shares by hitting the ask price of $14.97.  So a total of 600 shares were traded yesterday, the day of its earnings release.

For those who follow this blog, you do not need to be reminded that I frequently research and buy thinly traded securities that are not followed by any analyst such as EBTC.  Rightly or wrongly, I think that I have an advantage focusing on the paths "less traveled by" others.  I am not sure that I value my research on an Intel or Wal-Mart as much as I do for the EBTC's of the stock world.

6. SOLD 100 TOBC at 23.115 (Regional Bank Stocks' basket strategy)(see Disclaimer):  At this stage in the economic cycle, I will not tolerate a bank reporting an unexpected loss, which is what Tower did yesterday. Reuters   The bank reported a GAAP E.P.S loss of 54 cents per share and an adjusted loss which excluded some items of 2 cents per share.  I also noted that the bank had an increase of loan delinquencies during the quarter of 23.3 million dollars, another unacceptable metric.  Of that amount, 6.99 million came from First Chester, a recent acquisition that has concerned me,  and those delinquent loans did not have reserves marked against them. Press Release  I was able to exit the position at a profit, which was another consideration for selling the shares. Bought 40 TOBC at 21.35  Bought: 60 TOBC at 21.75 The First Chester acquisition may end up working out, but there is reason for concern as noted in my earlier posts and in this recent earnings report.   

Whenever a firm starts out a press release discussing quarterly earnings by mentioning virtually anything but the quarterly earnings, then you know that some negative surprises are coming about the quarter, buried deeper into the release.    

My realized gains in the regional bank strategy are being tracked in Item # 3 Realized Gains Regional Banks.   After the disappointing earnings released by Hudson (HCBK), and its forecast for 2011, the unrealized gain fell by about $1500 to $7000, but has since started to move up again. 

7. Flushing Financial Corporation (FFIC) (own: Regional Bank Stocks' basket strategy):  FFIC reported earnings of 28 cents per share, a 13 cent increase from the year ago quarter. The consensus estimate was for 31 cents.  Net interest margin increased 27 basis points to 3.41%.  That makes Hudson look really bad, since FFIC is a similar institution in the NY geographic market.   For Flushing Savings Bank, the total capital ratio was 14.34% as of 12/31/2010, with 8% being the minimum requirement for well capitalized banking institutions.  

I own 50 shares in the regional bank basket: Bought 50 FFIC at 12.18 

8.  United Bancorp, Inc (UBCP)(own: Regional Bank Stocks' basket strategy):  United Bancorp, Inc, one of the smallest banks in my regional bank basket, reported net income for the 4th quarter of $733,033 or 15 cents per share, up from 14 cents in the year ago quarter.  The net interest margin was up 4 basis points to 4.02%.   For the year ending 12/31/2010 the bank maintained an average cash and cash equivalent balance of 37.8 million, significantly higher than for the year 2009.  It consequently allowed certificates of deposit to decrease as a source of funding.  There was a 16.6% decrease in NPLs.   A new branch was opened in the second quarter at Tiltonsville. I had to look at a map.  It now has 20 branches. As of 12/31/2010, NPLs to total loans was at 1.62%; the dividend payout ratio was close to 100% at 96.55%; and the total allowance for loan losses to NPLs was low at 51.67%.

The coverage ratio may (or may not) indicate a problem down the road,  since the bank may not be provisioning now for loan losses that have already hit NPL status.  This may not be the case, depending on how well the bank is evaluating the market value of the collateral for each NPL.    I can just say that I am uncomfortable with a coverage ratio of less than 80%, and much prefer one over 100%.

Another concern is the payout ratio which is hovering near 100%.  The dividend yield is close to 7% at the current price. UBCP Stock Quote  It would not shock me to see a cut in the dividend at some point if earnings do not accelerate.  The capital ratios are clean, which is the way I refer to the capital ratios for a bank that did not participate in TARP.  Unclean for me means a bank that has government preferred stock supporting their capital ratios.   


  1. Re: item 1, in which you discuss how you compare the relative attractiveness of several BofA equity preferred floaters by constructing scenarios where 3 month LIBOR is 3%, 5% or 8%, demonstrating that the less expensive issues outperform when LIBOR is 3% or above.

    I think it would be worth considering the implications of higher 3m LIBOR on BAC's portfolio of mortgages and mortgage-backed securities. Certainly 3m LIBOR at 5 or 8% would be associated with vastly higher mortgage costs. Even if the yield curve were inverted, it is hard to imagine that 30 yr mortgages wouldn't be at least 3% higher than they are now, and resetting adjustable rate mortgages would be affected even more adversely over time.

    That would likely increase the number of delinquent loans, depress the housing market, and raise anew fears about BAC's solvency. (Since mark to market accounting was suspended during the crisis their balance sheet is something of a black box).

    The result might be that owners of BAC equity preferreds would start to worry about suspension of their dividend payments, or even about the solvency of BAC, which could dramatically depress prices, as in 2008/9.

    Put differently, I tend to agree with Bill Gross (quoted in Barrons) that the Fed is likely to keep the federal funds rate (which historically tracks 3 mo LIBOR) low for a long, long time, until the banks and the housing market heal. Under that scenario the guaranteed rate (3% or 4%) is the one to pay attention to.

    P.S. I really enjoy your blog and have learned a lot. Thank you.

  2. VINCE: It is only necessary to post a comment once. To avoid spam postings, any comment has to be approved by me before it appears, so there will be a lag. I will approve about anything that is not spam. I will delete comments that attempt to use my blog to sell something, which occurs at least once a week, usually someone hyping their book or online gold sales. My site is non-commercial.

    The mere fear, legitimate or not, about BAC's solvency would cause the non-cumulative equity preferred stocks to crater in value.

    For now, I am in the camp that short rates will start to rise and inflation will become a serious problem for fixed income investors. Since Gross may be right, I own 100 of BMLPRL, which is ex dividend today, which pays me the higher guarantee, and 50 shares each of the two floaters with 3% guarantees that go ex on 2/11 which will do better in a rising LIBOR setting. Someone who believes in the Gross scenario may want to weight those with higher guarantees that result in a greater dividend yield now.

    I am not presently concerned about BAC's solvency. I will simply have to re-evaluate that issue as conditions warrant. And fears of solvency, even when unwarranted, can result in these non-cumulative equity preferred stocks plummeting in value. I noted a buy in this post a buy of BMLPRG at $8.8 and that was in May 2009. I picked up one of its junior bonds with a 25% annualized yield. And, they never missed a payment.

    I would not invest much money in these kinds of securities due their issues. I do believe that they have a limited function, along with the synthetic floaters and the CPI floaters, in an investors portfolio loaded with fixed coupon bonds which includes me. Who really knows what the future will bring? These types of securities which pay the greater of a guarantee or a percent over a short term rate can swing both ways, and the main concern that I have with them is the credit risk.
    One thing that I keep in mind is that BAC is too big to fail, and it would look extremely bad for them to ever eliminate the common stock dividend. As long as that dividend is being paid, even a penny, my dividends on the preferred stock have to be paid. What would you do if you had 500,000 in CDs at BAC and you heard that it had to eliminate the common and preferred dividends to preserve capital.