Monday, January 31, 2011

Sold 100 of 150 PKM at 25.93/STL/Added 50 FNFG at 13.97 & Sold 50 GBCI at 14.58/Term Junk Bond ETFs/ VLY NHTB/More on Vix Asset Allocation Model

The Old Geezer, our new Head Trader here at HQ, is already complaining incessantly about working too hard.  There is barely enough time during the trading day for the OG to leave the trading desk to munch on a few Fritos and to cram down the normal daily allotment of Hershey Kisses, just a small bag of each the OG noted for all of those health nut readers.   Headknocker was sympathetic sort of, or a more appropriate description would be sympathetic for the HK, and ordered a staff member to add some Kisses to the OG's IV solution, and to up the dose of Pepto Bismol to a liter per hour. HK had under active consideration a mainline infusion  into the RB of his special concoction of Xanax. Lunesta and Valium, since the RB was having an unusually strong, undo influence on the OG since LB went on strike. Yes, LB has gone on strike again after Headknocker ordered it to read about 20 Moody's reports over the weekend.  LB said that it gets not respect in this operation, even though it does all of the work, let that "Old Goat and his Nit Wit ally research their hair brain ideas which occur to them with increasing regularity".  RB replied, "go All-In".

The latest revision to 4th quarter GDP shows an increase of 3.2%: News Release: Gross Domestic Product Final sales increased by 7.1%, the largest increase since 1984.

One out of nine homes in Las Vegas received a foreclosure notice in 2010: MarketWatch

The market developed the shakes last Friday, as uprisings spread across the Middle East. I decided to do very little last Friday, and just wait to see what happens. If investors want to get the shakes worrying about something, just look at the emerging double dip in housing prices nationwide and the stubbornly high unemployment rate in spite of massive fiscal and monetary stimulus.  Evidence of the double dip in home prices nationwide can be found in an article in today's  WSJ.com and in the recent releases of the Case Shiller index, see for example my discussion at  Case Shiller.

The OG invited the LB back to discuss its Vix Asset Allocation Model, knowing the LB could not resist staying on strike when it had a platform to pontificate for hours about one of its pet theories:

The ^VIX popped 24.09% last Friday, closing at 20.04. That is not sufficient to interrupt the count of continuous movement below 20 relevant to the formation of a Stable Vix Pattern.  I will allow some temporary movement above 20, particularly when the movement has been below 20 for weeks which has been the case recently, and provided the break above 20 is relatively short and not too steep.

Zulauf  recommended buying volatility in the Barron's  Roundtable Part II. So far, based on last Friday's action, he has been correct on that call. I added in my discussion on his recommendation that buying volatility, and paring stock positions and/or buying hedges for stocks, was a strategy applicable in an Unstable VIX Pattern when the VIX moved below 20 and meandered below 20 for a few weeks. That reduced volatility would be accompanied by strong stock market performance.

The hallmark of the Unstable Pattern in Phase 1 is that the market will be easily spooked by an external event and volatility will spike, rising to the high 20s and then above 30. Vix Asset Allocation Model Explained Simply  The pop last week was due to the growing turmoil in the Middle East.  The pop in the VIX starting in April 2010 was due to the sovereign debt crisis in Europe. ^VIX Historical Prices That whipsaw pattern is the defining characteristic of the Unstable Vix Pattern.  I have made this point over and over again since starting this blog in 2008.  Back in 2008, I discussed buying SDS, the double short for the S & P 500, as a hedge when the VIX moved below 20 during the Unstable Vix Pattern. (More on VIX AND ASSET ALLOCATION: November 2008)

I would add this important caveat, however. History has told us that the Unstable VIX pattern will eventually give way to a Stable VIX Pattern, where volatility remains subdued for an extended period of time and stocks rise more or less in a 45 degree upward slope. VIX and S & P Compared 1990 to 1997 Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2 That pattern has lasted for years in the past.  Obviously, when the transition occurs, the investor does not know whether the stable pattern is forming or that the fall below 20 in the VIX is just another head fake in the Unstable Vix Pattern. If it is the former, selling stock in response to the decline below 20 would need to be reversed when and if there is a formation of the Stable Pattern (index investors would hold after the formation of the Stable Vix Pattern until the next Trigger Event before reducing again, the last Trigger Event was in August 2007-VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern).

It is not clear now whether a Stable Vix Pattern is forming or whether the market is going to decline again with the VIX spiking to well over 20. That is why I require at least 3 months of a dominant movement below 20 to make a decision on whether the transition has in fact occurred. This period was based on a review of historical VIX information performed when I first developed the model in the spring of 2007.  Based on the historical record only, I found that the movement below 20 for 3 months would signal the end of the Unstable period. This time may be different of course. I am starting the current VIX movement below 20 on 12/2/2010:  ^VIX Historical Prices (see also Current Status of The Vix Asset Allocation Model Signal (Aug 2010); Item # 3 Update to Status of VIX Allocation Model  (Jan 2011).

BMLPRL, a non-cumulative perpetual equity preferred floater with a guarantee, was ex dividend for its quarterly distribution last Friday. BMLPRH is on a different schedule and will go ex dividend on 2/11/2011, which is also the case for BMLPRG, I have said many times in this blog that the phrase "non-cumulative, perpetual equity preferred stock" is not brimming with favorable words for an investor.  Cumulative is better than non-cumulative. Perpetual for a fixed income type of investment is never preferable to a maturity date. A preferred stock has no equity interest in the business and is junior in priority to all bonds.

So, I do not go crazy with these investments. They do have a function, in that the guarantee provides a measure of protection for the fixed income investor during a period of deflation or low inflation while the float offers some inflation protection. The equity preferred and synthetic floaters, along with the CPI floaters, do provide ballast and some balance to a portfolio heavy with long fixed coupon bonds.

And, at least for now, the equity preferred floaters like BMLPRG, BMLPRH and BMLPRH pay qualified dividends, a relevant issue for well off U.S. citizens looking for income in taxable accounts.

Advantages and Disadvantages of Equity Preferred Floating Rate Securities (see also Synthetic Floaters Floaters: Links in One Post)

Guggenheim has launched several term junk bond ETFs:


This is a link to the holdings for the 2015 term ETF:  BSJF  The expense ratio is .42%.

This is a similar product to the term investment grade bond ETF discussed in several earlier posts.

Since I have a large number of stocks in my regional bank basket, and have already discussed a significant number of their respective 4th quarter earnings reports, I am going to omit discussions of the following, although I did review the press releases referenced below:

First Financial (FFBC):  FFBC 4TH QUARTER EARNINGS PRESS RELEASE 
Provident Financial (PFS)  SEC FILED PRESS RELEASE: 4TH QUARTER EARNINGS 

All of my positions in those banks are 50 share lots and are just immaterial.  Besides I am sick and tired of discussing these bank earnings. I will discuss the Sterling Bancorp's earnings since I own 210 of its TP STLPRA and 50 of its common shares, so STL is more important to me than ORIT for example.  I will pay more attention to STL because of my bond holding. 

On Friday, the 50 share position in WBS crossed the up 400% threshold.    

1.  First Niagara Financial Group (FNFG) and Valley National Bancorp (VLY) (own: Regional Bank Stocks' basket strategy): 

These two banks are important since I now own 250 shares of FNFG and 200 shares of VLY, and will consider adding more.

First Niagara reported non-GAAP income of 49.7 million or 24 cents per share, beating estimates by 1 cent. The comparable number from the 4th quarter of 2009 was 17 cents. The GAAP number which includes acquisition related expenses was 22 cents. The current consensus estimate for 2011 is for an E.P.S. of $1.02. The last earnings report is discussed in this article at TheStreet.

I have a favorable view of FNFG's pending acquisition of New Alliance (NAL), a well capitalized bank headquartered in Connecticut. NAL reported 11.3 million in net income for its 4th quarter. I owned some shares in NAL when FNFG made its offer. This is a link to a map of NAL's 88 branch locations in Connecticut and Massachusetts: Locations | NewAlliance Bank

As of 12/31/2010, FNFG's net interest margin was 3.64%; the efficiency ratio for its banking segment was at 65%; it had 257 branches; the total risk based capital ratio was 11.86% for the bank and 14.35% for the holding company; the nonperforming loans to total loans was at .85%; and the TEXAS RATIO was 8.94%. 

FNFG also raised its quarterly dividend by 1 cent to 16 cents per share. The current yield is around 4.57% at a $14 total cost number per share.  


I have those shares in two separate accounts. I am reinvesting the dividends in one and taking the dividend in cash in the other. I added 50 shares to FNFG on Friday, see # 2 below, bringing my total to 250 shares.  I added those 50 shares in the brokerage account where I am reinvesting the dividends. 

Valley National reported 4th quarter net income of 38.2 million or 24 cents per share, up from 18 cents in the 4th quarter of 2009 that was impacted by 3.5 million in dividends and "accretion" of Valley's preferred stock issued to the U.S. government. VLY redeemed that stock in full in 2009.  The consensus estimate was for 22 cents.  According to YF, the consensus estimate for 2011 is for an E.P.S. of 86 cents with the high estimate at 94 cents among the 10 analysts.

The net interest margin was 3.63%, up from 3.47% in the 4th quarter of 2009. As of 12/31/2010, the total capital ratio was at 12.91% on a consolidated basis; the Tier 1 leverage ratio was 8.31%; the efficiency ratio was at 53.97; the allowance for non-covered loan losses as a percentage of non-covered loans was 1.35% (VLY has a covered loan agreement with the FDIC); and total non-accrual loans as a percentage of total loans was at 1.12%.  

2. Sold 50 GBCI at 14.58 and and Added 50 FNFG at 13.97 (see Disclaimer):  When I discussed the 3rd quarter earnings report for GBCI, I referred to it as "borderline pathetic". Item # 1  GBCI. The bank's 4th quarter report was another less than stellar performance. The bank is basically just earning enough per share to cover its 13 cent per share quarterly dividend. While its capital levels are good, its earnings growth is disappointing and the level of its NPAs is not what I like to see, although that number improved to 3.91%. Glacier Bancorp, Inc. Announces Results for Quarter Ended December 31, 2010 

Its allowance for loan losses to NPAs is 51%. The 13 cent per share number for the 4th quarter included 2 cents from security sales and was a 13% decrease from the year ago 15 cents per share. While GBCI was listed as one of Cramer's favorites in his book "Getting Back to Even", I do not believe that strong capital levels is enough to keep me in the stock when a bank like FNFG looks a lot better to me now and over the long term.  So I sold out of GBCI and increased my position in FNFG by 50 shares to 250 shares. 

GBCI closed at $14.45 last Friday, down 4.24% for the day.   FNFG closed at $13.98, down 37 cents or 2.6%. 

3. Sterling Bancorp (STL)(own 210 shares of the TP STLPRA)(own:Regional Bank Stocks' basket strategy):             

Sterling reported net income of 3.5 million in the 4th quarter, an increase of 46% over the 2 million earned in the year ago quarter.  Sterling sold a lot of stock in March 2010 and its share base increased by 48% from the year ago quarter. Notwithstanding that larger share base, earnings per share were reported at 13 cents for the last quarter, up from 11 cents in the year ago quarter.     

As of 12/31/2010, the net margin was 3.98%; the total risk based capital ratio was at 14.68%; the tangible common equity ratio was at 6.81%; the Tier 1 risk based ratio was at 13.61%; the allowance for loan losses to nonaccrual loans was at 274.5%; and NPAs to total assets was at .29%. 

I own 50 shares of the common bought  at $6.58 (Dec 2009). I also own its TP, which has a 8.375% coupon on a $10 par value. Interest payments are made quarterly. While the the underlying bond and the TP mature in 2032, Sterling has the option to call both of them now. www.sec.gov  Sterling has less than 15 billion in assets, so it may continue to include its TP as part of its equity capital. I suspect that this call option will restrain any price appreciation above the $10 par value plus accrued interest.  

I have bought and sold the TP and currently own 210 shares.  


4. Sold 100 of the 150 PKM at 25.93-All Shares Sold in IRAs (see Disclaimer): I had received notices from two brokerage companies that PKM was being called at its par value of $25 plus accrued interest. PKM Called Unlike previous calls, I have not found any confirmation such as a filing with the SEC or a press release. In any event, the $25.93 gives me almost all of what I would receive in the event of a redemption on 2/15. I went ahead and sold the position in my retirement accounts, 50 in the ROTH IRA and 50 in a Regular IRA, so I could go ahead and plan for the reinvestment of those funds. 


The fifty shares in the regular IRA had a total cost of $17.76:


I still own 50 shares of PKM with a similar average cost, bought at about the same time.  PKM has a 8% coupon and pays interest on a semi-annual basis.  So the total return was good, particularly for a bond.

TRUST Certificates: Links in One Post

5.  New Hampshire Thrift Bancshares (NHTB)(own:Regional Bank Stocks' basket strategy): Friday was a bad day for the market and regional banks.  NHTB bucked the downtrend and closed at $13.20, rising 20 cents for the day. NHTB is one of my smallest banks in the regional bank basket. It has 28 branches located in west central New Hampshire and central Vermont.  Market capitalization is close to 77 million at the current price.  I bought 100 shares at $9.51 (JAN 2010).  At the time of my purchase, the dividend yield was around 5.5% at my cost.  Needless to say, with this kind of investment, I am not trying to shoot the lights out. I would be more than satisfied with a total return of around 10% annualized, with some years better than others. I could sell the shares now and realize much more than that 10% annualized total return.

When I originally discussed this bank, there was an analyst estimate but apparently that firm dropped coverage. NHTB reported net income for 2010 at $1.29 per share, up from $1.06 in 2009. At the $13.2 closing price from last Friday, that would translate into a P/E of 10.23  based on trailing earnings. The 4th quarter E.P.S. was 34 cents per diluted share, up from the 28 cents earned in the 4th quarter of 2009. The Tier 1 core capital ratio was 8.28% at the end of 2010. Book value per share was $14.26. The dividend payout ratio was 40.31% for 2010. The current quarterly dividend rate is 13 cents per quarter. At Friday's close, that would result in about a 3.94% yield.

On the downside, the bank has had a 52 cent annual dividend from 2008 through 2010. While there has been no increase in those three years, another way to look at it is that there was no decrease either.  The annual rate did rise from $.32 per share in 2003 to $.52 in 2008.  The share price topped out at $20.25 in 2005 and came close to $6 in both 2008 and 2009. New Hampshire Thrift Bancshares Stock Chart 

Friday, January 28, 2011

Call Warrant Exercised on MJT and MJV

I own two trust certificates, MJT and MJV, that contain as their underlying security the same TP, in effect a junior bond from the electric utility DPL.  Bought 100 MJV at $24.8 (Oct. 2009).  MJV has a 8% coupon.  MJT's coupon is 7.75%.  So both of these TCs provide a good income stream for me.  

The trustee has received notice that the owner of the call warrants attached to those TCs intends to redeem them at par value plus accrued interest on 2/22/2011.  Both of these TCs pay interest on a semi-annual basis and last went ex interest on 8/11/2010.   If the call warrant owner makes that payment to the trustee, then it can take possession of the securities owned by the trust.  I have lost a good number of bonds this way, as the Fed's Jihad against savers and responsible Americans moves toward its 4th year. 

The notices contain the following statement that will be found in any of these notices:  "Under the terms of the Call Options, the exercise of the Call Options may be rescinded prior to the Intended Settlement Date, in which case settlement of the relevant Call Options would not occur and the Call Options would continue in effect and could be exercised on a subsequent date. If settlement of the Call Options occurs pursuant to the notice of exercise on the Intended Settlement Date, then Class A Unitholders will receive the par value plus accrued interest of each Class A Unit . . ." 



The notices are also available at the SEC's web site: MJT  MJV

Both of these TCs were Morgan Stanley originations.  I would assume that MS owns the call warrants attached to all of the TCs originated by it.   And, if that is true,  MS has been very active in exercising those warrants to make a few quick and risk free millions.  

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  www.sec.gov.    

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? - CNBC.com  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- usitc.gov/.pdf 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:    www.sec.gov 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.  

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

Guarantees:
BMLPRJ:  $54
BMLPRG: $46.50

3% LIBOR:
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

8% LIBOR:
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.