Friday, January 28, 2011

RB Bought 1 Eastman Kodak Bond Maturing 2013/Bought 100 of JLA at 12.84/Bought 30 FHN as an LT at 11.34/ Sold 101 AF at 14.89/ WSBC, NWBI, WASH MBVT TRMK/Bought 50 INZ @ 23

The TC KTX went ex interest for its semi-annual interest payment yesterday.  When I buy a trust certificate, I will frequently use the word "share", which is fine, but technically "share" is the wrong word.  I am buying a "certificate" that represents an undivided beneficial interest in the assets owned by a grantor trust administered by an independent trustee.  I just prefer to say "share" rather than all of the foregoing.   The underlying asset owned by the trust which issued the TC KTX is a Xerox Capital Trust Preferred (TP) security.  A TP is yet another trust, called a Delaware Trust,  and the owner of that security has an undivided beneficial interest in assets of that trust which is a junior bond issued by Xerox Capital.  So when I discuss this kind of security, I just strip away the multiple legal layers and just refer to KTX as, in effect,  a junior bond from Xerox Capital.   This security was the subject of two recent posts, as staff debated whether or not to sell Headknocker's 100 shares when there was a brief pop in the share price to over $27.  Item # 8 More on KTX; Intro Section at KTX. (see also Bought 50 KTX at 25.14 Roth IRA  Added 50 KTX at 25

PIS, a TC containing a senior Liberty Media bond, was also ex interest yesterday for its semi-annual interest payment.  

I thought the charts contained in this article at Seeking Alpha were helpful. In those charts, the author calculates the total return of CEFs.  You have to click the charts to review the information.  As an example, EOI, which I own, has a total return based on accumulated distributions plus 2010 year end net asset value of 21.31%, since its inception in 2004.  I do not view that in a positive light.  I have slated my small position in EOI for liquidation, the only issue is the timing of its disposal.        

I had not attempted to use the TD Ameritrade site for buying bonds online.  Yesterday I went into it and found that I could obtain the Moody's reports on any company issuing bonds, simply by entering the bond CUSIP number.  LB will have some reading to do over the weekend. 

1. Bought 100 of the stock CEF JLA at 12.84 on Wednesday (see Disclaimer) The Nuveen Equity Premium Advantage Fund (JLA) is a stock closed end fund (JLA) that seeks to "replicate price movements of a 50%/50% combination of the S & P 500 Stock Index and the Nasdaq-100 Stock Index, respectively" As of 1/26/2011, the day of my purchase, this CEF had a net asset value of $13.82 per share and closed that day at a -7.09 discount to its NAV. The fund has a managed distribution policy, and currently pays a quarterly dividend of $.317 per share.  At a total cost of $12.84, the yield is around 9.88%.

Due to Near Depression, the fund was not able to support this dividend with capital gains and consequently part of the dividend distributions in 2009 and 2010 were classified as returns of capital.   Morningstar rates the fund 3 stars.  The Morningstar site also now contains information about return of capital distributions for the past three years, and I regularly consult it whenever I am considering a CEF purchase. Given what happened in the Dark Period, I am not going to place much negative weight on the fact that stock CEFs supported too generous dividends by returning some of their investor's capital. 

This is a link to the last filed  Form N-Q which lists the funds holdings as of 9/30/2010. As shown in that report, the fund sells call options on the S & P 500 and Nasdaq 100 in an effort to reduce volatility.  The fund also reports in that filing that the value of its stock investments had risen to $367,949,430 with a cost basis of 293,405,451.  That suggests that the fund could support the 2011 dividend with capital gains.  It will never be able to support the dividend at its current level without those gains.    

The last shareholder report for the six month period ending in June 2010 can be found at    

2. Bought 30 FHN at 11.34  (LOTTERY TICKET strategy) (see Disclaimer): This is another LT buy in the bank industry that I intend to ignore for at least the next five years, unless I am forced to deal with an acquisition offer that involves the exchange of shares. The 30 share buy of KEY, discussed in yesterday's post, falls into the same category.  For these type of "bets", I will discuss the company when I make my initial purchase and will then have nothing further to say about it.  

FHN is the holding company for First Tennessee Bank, which has about 180 branches in and around Tennessee. Several years ago, the CEO of FHN, who has since "retired", decided to expand the bank's "footprint" outside of Tennessee and went national with its mortgage operations. Well, that turned out badly. As a result of mistakes made by management, who received excellent compensation, the share price sank from $42.65 in early 2007 to $6.4 in July 2008. FHN Interactive Chart The cash dividend was eliminated and shareholders thereafter received just a stock dividend. Now, after stabilizing some, the Board just announced the resumption of a quarterly cash dividend.  How much? FHN will pay a penny a share to shareholders of record on 3/1, the first cash dividend since October 2008.  Maybe that could be called progress for FHN shareholders who bought the shares many years ago, only to see the share price return to levels last seen in 1995 and that is after a fairly robust rally off the 2008 lows.

I have mentioned in email discussions with several readers that it would not be prudent to rely on banks for a dividend income stream during retirement.  In my investing career, they have managed to blow themselves up on three occasions as an industry.  Possibly, one could draw the conclusion that there are, generally speaking, not that bright and unable to draw any big picture conclusions from information readily available to them.

So why bother with FHN?  As I mentioned, the CEO who is responsible for the mess is no longer at the bank.  FHN has just paid back 867 million in TARP funds. Strategic Progress, TARP Retirement Create Momentum for First Horizon in 2011   Funds for that repayment came from the issuance of 500 million in senior notes maturing in 2015 with  a 5.375% coupon and from the sale of 23,809,523 shares at $10.5.  Pricing of $250 Million Public Offering of Common Stock After FHN returned to what the bank knows best, banking in Tennessee, there is now some hope for the future. The best hope would be for the bank to be acquired, putting the shareholders out of their misery.

I did not see the interview of the new CEO, Bryan Jordan, by Jim Cramer until after I bought those 30 shares.    A New Horizon? -  Cramer recommended pulling the trigger, for whatever that is worth.  I am far less enthusiastic. 

This is a link to the 4th quarter earnings report:  Press Release

FHN closed at $11.6 yesterday, and has a negligible cash dividend hardly worth the effort of paying.  

As of 12/31/2010, the tier 1 capital ratio was at 13.96%; the tangible common equity to tangible assets ratio was 8.31%; NPAs were at 4.48% (one reason for the limiting exposure); tangible book value per share was $8.31; the efficiency ratio was at 88.7% (another reason to limit exposure); and the net interest margin was at 3.18%.  

3.  Sold 101+ shares of AF at 14.89 (Regional Bank Stocks' basket strategy)(SEE DISCLAIMER):  While I had a positive reaction to AF's earning report, I elected to sell my remaining 100 shares bought in two 50 shares lots  @ 13.08 and @ 12.08, since I did not have the same favorable view as the buyers' yesterday.  The stock popped 6.47% to close at $14.81.  I just do not have that kind of enthusiasm.  I also had slightly more than 1 share from reinvestment of a dividend.   

Astoria reported 4th quarter net income of 23.8 million or 25 cents, up from 9 cents in the year ago quarter. The consensus estimate was for 21 cents per share. The latest quarter included 2 cents in charges which AF says are not routine to its core operation, while the year ago quarter had 12 cents per share of those non-routine charges.   

My realized gains from the regional bank strategy are now over $4000.  I am tracking those gains in Item # 3 Realized Gains Regional Banks

4.  WesBanco (WSBC)(own: Regional Bank Stocks' basket strategy):   WesBanco reported net income of 10.3 million or 39 cents per share, up 44% from the 27 cents earned in the 4th quarter of 2009.  The consensus estimate was for 30 cents per share. "WesBanco continued to improve already strong regulatory capital ratios of 8.35% tier I leverage, 11.92% tier I risk-based capital, and 13.17% total risk-based capital, all of which improved in each of the last five consecutive quarters while both consolidated and bank-level regulatory capital ratios are well above the applicable "well-capitalized" standards promulgated by bank regulators."  As of 12/31/2010, the net interest margin was at 3.6%, up from 3.36% at the end of 2009; allowance for loans losses to NPLs was .63%; NPLs to total loans was at 2.93%; NPLs and loans past due for 90 days to total loans to total loans was 3.16% (normally that metric is not a line item in a report); and the total risk based capital ratio was 13.17%, up from 12.37 at the end of 2009.  

 Bought 50 WSBC at 13.3  WSBC closed at $18.8 yesterday, up 59 cents, and yields about 3.08% at that price.   

5. Bought 1 Eastman Kodak Senior Bond Maturing 11/15/2013 at Limit 94.9 (95.7 with concession)(Junk Bond Ladder Strategy)(see Disclaimer):  RB wanted to buy a bond yesterday, so the Old Geezer said pick one.  The OG is almost always willing to let the RB strut its stuff within limits of course, unlike the LB who wants to crush what it refers to as the "noise problem" once and for all.  RB gathered the list of bonds available for purchase in 2013, gathered together all of its investing prowess, and hurled a dart at a sheet of paper containing a list of the bonds.  While it was subject to some dispute among staff members, the consensus was that the dart hit the name of Eastman Kodak.  OG congratulated the RB on the refinement of its security selection technique, much improved over the prior method.  

Headknocker just let the OG and the RB know that they are both skating on some pretty thin ice with this selection. Maybe it is time to "go back to the Nerd as Head Trader", HK muttered with some alarm. 

This bond has a 7.25% coupon.  This is a link to the FINAL PROSPECTUS SUPPLEMENT for this bond.  I know that it is a senior bond just from this phrase in the prospectus: "The notes will be our unsecured and unsubordinated obligations and will rank equally with all of other unsecured and unsubordinated indebtedness". (page S-6).  Interest is paid semi-annually in May and December.  

My confirmation states that my current yield is 7.575%, and the YTM is 9.020%.

According to FINRA, Fitch assigns a generous B+ to this bond.  The ratings from Moody's and S & P start with what I would view as the more appropriate letter, Caa1 and CCC, respectively. 

This is a bet that the Eastman Kodak Company will survive at least until my loan is paid off in November 2013.  The market did not care for its last earnings report:  NYT The  Press Release announcing the 4th quarter earnings did contain one piece of encouraging information, the company ended the year with "more" than 1.6 billion in cash. I was more interested in the firm's debt and maturity schedule.   As shown in note 5 to its last filed Form 10-Q, the debt maturing before that 2013 appears to be manageable, with 100 million due before 2013 and 350 million in 2013.    

A very negative view of EK's prospects can be found in this recent article (1/2011) and another that nominated EK as the Worst Stock for 2010 published in 1/2010   (see also discussion in this Bloomberg article about a judge's decision at the U.S. International Trade Commission that the IPhone and Blackberry do not violate Kodak's patents)

(Added 9/11: Two more recent posts discussing EK bonds can be found at Moody's Cuts EK Bonds Further into Junk 9/29/11 Post and  Eastman Kodak (EK) Bonds-Own 2013 Senior Bond 9/30/11 Post)

(added 10/24/12: due to a number of adverse developments since Kodak filed for bankruptcy, the 2013 bond is trading near 10, FINRA. Those developments include a poor reception to the auction of Kodak's patent portfolio, continued losses from operations, and a loss of its patent case before the ITC, see  Eastman Kodak Bankruptcy (January 2012 Post); EK (loss of patent case at ALJ level- later affirmed by the ITC, see EK and WSJ)

6. Washington Trust Bancorp, Inc (WASH)(own: Regional Bank Stocks' basket strategy):  Washington Trust reported 4th quarter net income of 7.2 million or 44 cents per shares, up from 30 cents in the year ago quarter. The consensus estimate from 3 analysts was 40 cents per share. As of 13/31/2010, the net interest margin was 3.05%, the total risk based capital ratio was 12.79%; the Tier 1 leverage ratio was 8.25%; the estimated tangible equity to tangible assets ratio was 7.14%; NPAs to total assets was .79%; and the allowance for loan losses to NPLs was at 154.42%.  

Bought 100 WASH at $15.26  Sold 50 of 100 WASH @ 22.44  After taking a profit on 1/2 of my position, I intend to hold the other 50 shares.    The current quarterly dividend is 21 cents per share.  That gives me a yield of 5.5% at a total cost of $15.26 per share.  And, I have booked already a realized gain of $347.03 on the 50 shares sold earlier this month.   I may buy back those 50 shares on a price decline below $20 per share.   Currently, the consensus estimate is for an E.P.S of $1.68 in 2011.

 WASH closed at $20.99 yesterday, down 34 cents, and yields about 3.94% at that price.  

7. Merchants Bancshares, Inc (MBVT)(own:Regional Bank Stocks' basket strategy): Merchants Bancshares reported net income for the 4th quarter of 2.54 million or 41 cents, down from 62 cents in the 4th quarter of 2009.   The lower earnings were due to a 3.07 million dollar penalty for the early retirement of 46.5 million in debt.  MBVT expects to save 1.74 million from this debt retirement in 2011.   The 4th quarter earnings were positively impacted by a negative provision for credit losses of 1.95 million, due to improving asset quality and net recoveries for previously charged off loans.   As of 12/31/2010, NPLs to total loans was only .45%; the net interest margin was 3.37%; the efficiency ratio was 66.66%;  and the tier 1 leverage ratio was at 7.9%; and it looks like the coverage ratio was at 247%. The bank referred to loan demand as weak.  Merchants is one of small banks and has operations in Vermont.     Bought 50 MBVT at 22.9

The one analyst providing an estimate predicted 53 cents per share.  I did not attempt to calculate what the bank earned excluding the charge for early repayment of debt which is usually an item excluded from analyst estimates. 

MBVT closed at $27.32 yesterday, down 69 cents, and has about a 4% yield at that price.  

8.  Trustmark Corporation (TRMK)(own:Regional Bank Stocks' basket strategy):   Trustmark reported net income of 25.2 million for the 4th quarter or 39 cents per share, up from 23 cents in the year ago quarter. The consensus estimate made by 11 analysts was 38 cents.  As of 12/31/2010, the efficiency ratio was at 61.65; the net interest margin was 4.36%; NPLs to total loans was at 2.3%; and the total risk based capital ratio was at 15.77%. 

The current E.P.S. estimate for 2011 is $1.57 and $1.76 in 2012 according to YF

TRMK closed at $24.79 yesterday, and yields about 3.7% at that price. 

9.  Bought 50 INZ at $23 in the Roth IRA on Thursday (see Disclaimer):  During the Dark Period, I picked up some readers from the Netherlands, who speak excellent English, due to my discussions of ING and Aegon hybrids.  Both companies are based in the Netherlands and have extensive operations in the U.S. and around the world.   In my lifetime, I had not seen anything like the wild action in these hybrid securities during the Near Depression period.  After all, the hybrid securities from both ING and Aegon pay qualified dividends but are in effect junior bonds, hence the name "hybrid".  Weird, but true.  Those hybrids are similar to trust preferred stocks from U.S. financial institutions, in that they count as equity capital for regulatory purposes while being bonds.  Fortunately, the U.S. is phasing out the use of these bonds as equity capital as a result of the Democrat's financial reform legislation, at least for banks with more than 15 billion in assets.    Trust Preferred Securities & Financial Reform 

There are two primary differences between the European hybrids and U.S. trust preferred stocks, both are important form my point of view.  First, U.S. trust preferred stocks pay interest, taxable at my highest tax bracket.  The European hybrids pay qualified dividends.  And the top rate for qualified dividends of 15% was continued for all taxpayers, at least for now.  Second, the U.S. trust preferred stocks have a maturity date.  The European hybrids are perpetual.  While ING or Aegon have the option to call their hybrids, they are under no obligation to do so.  If the EC decides to prohibit their financial institutions from using hybrids as part of their regulatory capital, there may be an incentive to call some of the higher coupon hybrids, such as an IGK, and to replace it with a lower coupon senior bond.  I would be interested in any information on that subject, and have not attempted to research it.  

I have sold all of my ING hybrids, bought during the Dark Period and its aftermath, except for 50 shares of INZ which I still own in my regular IRA.  Buy of 50 INZ at 7.82  The average cost of those shares is $7.98: 

The coupon for INZ is 7.2% on a $25 par value: At that total cost number of $7.98, my yield is around 22.56% per year in perpetuity or until ING elects to redeem this hybrid at its $25 par value.    At that rate, money will double in 3.41 years.  Since I bought those shares, every quarterly dividend has been paid on time.  To my knowledge, this large Dutch financial institutions has never deferred a payment on its hybrid securities.  The dividends on optional deferrals are cumulative. 

The yield on the 50 shares bought yesterday at $23 would be about 7.85%:  ING Groep N V, INZ Stock Quote Dividend are paid quarterly, with the last ex dividend date on 11/29.  

I had other buys of INZ and other ING hybrids that are discussed in  ING  Hybrids and the posts linked therein.  Looking back, the most ridiculous buys were  50  shares of INZ at 6.52 and  50 shares of ISF at $4.6. I wish that I had held onto at least one of those, but both were sold at very large percentage gains.  Sold 50 ISF at $14.65  ISF has an annualized yield at my cost of around 34%.  That is per year.  What can I say, at least I was buying this stuff when everyone was throwing it overboard.  Another amazing buy in the regular IRA, which is still owned, is the Aegon hybrid AEH, purchased at $4.63 in March 2009, creating a perpetual annualized yield of around 35%, assuming of course no call and Aegon continues to make quarterly payments.

I also have a Gateway Post for the Aegon Hybrids.  I have been more comfortable owning them than the ING hybrids, since ING made far more serious and stupid mistakes in its investments prior to the Near Depression and was consequently hurt more by the meltdown.  Both ING and Aegon eliminated their common shares dividends.  The elimination of a payment on a junior security places the hybrid owners in an enhanced danger of having their dividends deferred, since the payment of a common dividend triggers the Mandatory Payment clause in the hybrid prospectuses.  Anyone wanting to invest in the European hybrids needs to become familiar with those provisions and the EC policy on burden sharing.  If one of these financial institutions need state aid in the future, the owners of its hybrids will most likely experience a deferral of their dividends as a condition to the receipt of financial aid from their state governments.  This did not happen for AEG and ING hybrids during the last financial crisis, but EC policy has made it clear to me that it will be different next time. 

All of the fixed coupon ING hybrids are functionally equivalent in my opinion.  IGK had the highest yield of the ING hybrids that I checked before buying INZ yesterday, but it is selling at above its $25 par value:     ING Group 8.5PC Perp Hyb, IGK Stock Quote.    I also did not want to buy less than 50 shares or invest more than $1150.   I want to not only keep playing with the house's money on the ING hybrids, but to play with some of the house's money still in my pocket. 

I am omitting a number of trades, some of which may be discussed in the next post.  

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