Tuesday, July 31, 2012

MORE on GYC/AGY/KO/Bought Back 200 FOFI at $7.02/Earnings: CNA (own TC JZV only),SUSQ, UBSI FISI PBNY VLY

I write this blog in a stream of consciousness mode. I think a great deal faster than I can type.  I will add the links where I think it would be helpful before I start to type (e.g. an earning report link) or after I finish the subject.

I am frequently making comments based on my memory. I have trouble remembering what I had for dinner last night. That is one reason for writing this blog. I can search my own blog for my prior analysis which I have probably forgotten over time. Sometimes, I wonder if another person wrote the post, but there is just me.

When discussing an earnings report, I will be looking at the report in a separate window while typing. I would urge readers to check the information with the original source material, since my memory is not what it used to be and my typing skills would not be described as competent by a secretary.

I was the only boy in a 9th grade typing class in Huntsville, Alabama and the teacher gave me a C+. I was surprised by that grade, fully expecting a "D" or an "F". I must have charmed the teacher, or maybe she just felt sorry for the only boy in the class who could not cut it. While my skills have improved over the years, I am prone to making typing errors that are not caught at the time of a post's publication, usually at 5:30 A.M. each business day. Sometimes, I catch an error and correct the text, but I am sure that there are numerous typing errors that have never been caught, particularly when typing numbers from earnings reports.

I am in no way a bond expert.  I did not start to buy bonds in the bond market until 2010.  For example, I could not make a calculation of a make whole payment if my life depended on it. I am basically guessing that the sum of all scheduled payments (principal and interest) for a fixed coupon bond maturing in 2034 or 2036 would be a significant sum, well in excess of par value at the current time, even after the discounting to present value.

In the Synthetic Floater GYC, the underlying bond has a make whole provision that can be found in  Sold 100 GYC at 22.22 : Ongoing Reassessment of Synthetic Floaters. The make whole payment would include the greater of par value or the sum of the present values of all "Remaining Scheduled Payments", discounted to the date of redemption on a semi-annual basis at the "Treasury Rate" plus .2%. The term Remaining Scheduled Payments is a defined term in this prospectus that includes principal and all remaining interest payments. So as I understand it, the discount would be applied both to the underlying bond's $1,000 par value and all of the remaining interest payments:

Defined Terms: Remaining Scheduled Payments 
While I can not do this calculation, software would be needed with the correct inputs on the discount rate, I understand that a larger number will be generated by a lower discount rate, and a smaller number by a larger discount rate. If I am discounting a 2035 bond payment to present value using a 3% Treasury rate, I am going to generate a larger make whole payment compared to a 6% rate. So to know the net present value I would need to know the discount rate, the principal amount and the total amount of interest payments remaining until maturity. I am assuming that would be a large number based on the time to maturity (23 years, a lot of interest payments) and the low discount rate due to the Fed's Jihad Against the Savings Class. This is why institutions will buy the underlying AT & T 2034 bond with a 6.45% coupon at a premium of 29% to par value at yesterday's close. That is my understanding. If anyone disagrees, please leave me a comment. I am learning about these provisions, just like everyone else.

With the egregious events surrounding the GJN, any investor willing to buy or to hold synthetic floaters needs to evaluate the likelihood of the underlying bond issuer avoiding a make whole payment and to make a guess at least of whether that make whole payment would likely exceed the "swap termination fee" computed by the insatiably greedy Masters of Disaster-Dickheads In Extremis-Slick Assholes Extraordinaire-Rapacious Greed Mongers-(just kidding really, truly), Rapers of Individual Investors (figuratively speaking of course).

Each investor will need to reach their own conclusion after careful research after the hosing of GJN owners.

In an interview with Barrons, Doug Kass mentioned that he owned the double short for the U.S. treasury, TBT. He was also negative on Goldman Sachs, a potential value trap, and American Express.

It is possible that the European Masters of Disaster are worse than their American counterparts. It was after all the AIG's London Financial Product's Unit that almost blew up the  world's financial system. (NYT article in its Reckoning series)

Reuters has reported that three major European banking institutions were knee deep in the Libor rate fixing scandal.

One of the small banks in my regional bank basket, Berkshire Bank (BHLB), became the first U.S. bank to file suit against those allegedly involved in the LIBOR rigging.  Reuters A copy of Berkshire's complaint can be found at the  WSJ.com. This is a class action lawsuit.

You generally do not see articles about chicanery committed by large Canadian and Australian banks. Perhaps there is something in the NYC and London water supply. The authorities need to check it out.

AGY announced that it had initiated a process to sell its "continuous filament mat (CFM) business". This would include a plant in Huntingdon, PA. that make up the "CFM business, including the wound products and conductive roving business".  SEC Filed Press  Release I own one second lien senior bond, maturing in 2014, currently rated at "CC" by S & P and at 10+ in my personal risk rating system, the highest risk in that rating system. AGY Holding I hope (pray?) that a lot of money is raised by selling that operation.

I am writing this post as an unpaid journalist. The primary focus of this journalism is how one individual investor is coping on a daily basis with a dangerous market and the Fed's Jihad Against the Saving Class.  On political issues, I am acting more as a columnist rather than a journalist.

The Coca-Cola Company declared its first dividend payable following the 2 for 1 stock split. Prior to that split, the company had paid 51 cents per share. The next quarterly dividend will be $.255 per share, which is of course equivalent to the 51 cents paid on the pre-split shares. The record date for the stock split shares was 7/27/12 and KO anticipates distributing those shares on or about 8/10/12. Stocks, Bonds & Politics: KO STOCK SPLIT Coca Cola rose $1.11 yesterday to close at $81.12.  My average cost per share is $50.83:

132+ Shares Average Cost Per share $50.83
When the shares split, my average cost will be $25.44 on twice the number of shares (264 rather than 132).

1. CNA Financial (own TC JZV): CNA Financial reported operating net income for the second quarter of $152 million or 56 cents per share. Book value per share was repoted at $45.34.

The company beat the consensus estimate by 3 cents.

I own 150 shares of JZV with an average cost per share of $19.20:

The underlying security is a senior CNA bond maturing in 2023. FINRA

It would be advantageous for the owner of the call warrant to redeem the trust certificates at their par value plus accrued interest, take possession of the bonds, and then sell them at a guaranteed and significant profit in the bond market. That call right will cap the appreciation of JZV.

As previously noted, the call right reserved by the trust creator is a known adverse feature, and one of the ways financial institutions take advantage of individual investors for their own benefit. Until that call right is exercised, the risk of loss from a default is borne by the owner of the trust certificates, while gains in the underlying securities above par value can be captured by the creator of the trust by simply exercising that call warrant.

Trust Certificates: New Gateway Post (also contains snapshots of trades)

Anyone considering the purchase of a TC needs to understand that call warrant and how it will impact the price for the security. In short, it would not be rational now for the TC JZV to sell at more than the $25 par value plus accrued interest, since the owner of the call warrant could redeem those certificates for that amount, take possession of the bonds, and sell them for a risk free return in the bond market. It is what it is. Just another way for brokerage companies to shift risk to individual investors (i.e. the risk of default of the underlying bond issuer), while keeping upside profit potential to themselves. Nonetheless, recognizing their rapacious greed for what it is, I have been successful booking over $24,000 in gains in trust certificates plus interest payments.

JZV is a fixed coupon trust certificate. It is not a synthetic floater with a swap agreement. It is the swap agreement which gave Wells Fargo an opportunity to royally screw the GJN owners, the beneficiaries of the trust created by Wells Fargo/Wachovia.

2. SUSQ (own TP SUSPRA and common as a LT): Susquehanna Bancshares reported second quarter net income of $37.8 million or 20 cents per share, up from 9 cents in the year ago quarter.

The capital ratios are good:

SUSQ Capital Ratios as of 6/30/12
I have traded the stock as a LT and currently own just 30 shares. Bought 50 SUSQ at $5.85-Sold 50 SUSQ @ 7.5Bought SUSQ at 8.75 (brief mention in introduction-5/16/11 Post)

I am anticipating that the TP SUSPRA will likely be called on or after 12/12/12. I will may sell my shares before that date if I can realize a gain on the shares bought at over the $25 par value. SUSQ can continue to treat this TP as Tier 1 equity capital, since it had less than $15 billion in assets as of 12/31/09. That does have a benefit to the bank since this "bond" can be included in equity capital and the interest payments are deductible to the bank. I discussed that specific issue in Item #2, ¶¶ 2 & 3 at Bought 50 SUSPRA at $25.25 ROTH IRA The problem is that the high coupon and overall better financial position will lead the bank to redeem this TP notwithstanding those advantages. 

I own 80 shares in the ROTH IRA: Bought 50 SUSPRA at $25.25 ROTH IRA;   Bought 50 AFE and 30 SUSPRA in Roth IRA (June 2010). This one currently has a 9.375% coupon. Final Prospectus Supplement Needless to say, I would be please to receive that coupon without losing anything on the shares. 

Susquehanna Bancshares rose 1 cent in trading yesterday to close at $10.54.

Susquehanna Capital I 9.375% Cap Secs. Series I (SUS.PA) closed at $26.24 yesterday.

3. UBSI (own: Regional Bank Basket Strategy)United Bankshares reported second quarter net income of 21 million or 42 cents per share, up from 40 cents in the 2011 second quarter. 

The consensus estimate was for 43 cents per share.

The capital ratios are good: 

UBSI Capital Ratios as of 6/30/12
As of 6/30/12, the net interest margin was 3.76%; the efficiency ratio was 54.5%; NPLs to total loans were at 1.23%; and the return on average assets for the quarter was 1.00%. 

I have been keeping the UBSI position due primarily to the dividend yield at my cost, which is close to 7% and to the historic growth of that dividend. Bought 50 of UBSI (November 2009).

UBSI continued to increase its dividend during the last two major banking crises. United Bankshares, Inc. - Dividend History The current quarterly dividend is 31 cents per share.

United Bankshares closed at $23.34 yesterday.

4. VLY (Own: Regional Bank Basket Strategy): Valley National Bancorp reported second quarter net income of $32.8 million or 17 cents per share, down from 21 cents in the year ago quarter (almost 20M more shares outstanding).

The consensus estimate, with 11 analysts contributing, was for 18 cents. The market reacted negatively to this report, sending the share price down 6.22% on a market up day.

The  capital ratios are okay:

VLY Capital Ratios as of 6/30/12 
As of 6/30/12, the net interest margin was 3.47%; the adjusted efficiency ratio was 62.63%; non-accrual loans as a percentage of total loans stood at 1.1% (total accruing past due and non-accruing 1.38%); and the annualized return on assets was .84% during the quarter.

Valley has been a major disappointment but I am keeping it for now. The dividend yield is good but the payout ratio is uncomfortably high. A dividend cut is certainly a possibility, particularly if there is not a significant improvement in earnings. The quarterly dividend is currently $.1625 per share and VLY's last quarterly E.P.S. number was just 17 cents.

Most of these banks provide historic dividend and stock split information, which is always useful to peruse. I am always interested in banks that managed to navigate a banking crisis without cutting the dividend.

Historical information about VLY cash and stock dividends can be found at Shareholder and stock NYSE VLY information - Valley National Bank.

I would note three comments made by the CEO during the earnings call. First, unlike many banks, VLY has faced "minimal requests" for mortgage repurchases sold to Fannie and Freddie. And, based on an "initial" review of the proposed Basel Three capital requirements, VLY believes that it "currently" meets the enhanced 2019 well capitalized regulatory capital ratios.  Lastly, while not giving any guarantees, the bank will do whatever it can to maintain the dividend.  Earnings Call Transcript

Valley National Bancorp continued its decline in trading yesterday, falling 16 cents to close at $9.44.

5. Bridge Bancorp (own: Regional Bank Basket Strategy)Bridge Bancorp reported second quarter net income of $3.1 million or 36 cents per share, compared to $2.5 million or 38 cents per share in the 2011 second quarter. BDGE sold shares last December which accounts for the lower E.P.S. number SEC Filed Press Release 

One analyst estimated earnings at 35 cents. Bridge is a small bank with 21 branches in Suffolk County, Long Island.

Bridge is a bank with comforting loan losses and a reserve already established for non-performing loans ("coverage ratio"):  

As of 6/30/12, the net interest margin was at 3.67% (down from 4.07% as of the 2011 2nd quarter); the efficiency ratio was at 60.1%; and the return on average assets was .87%.

The capital ratios are good:

I recently pared my position by selling 50 shares: Sold 50 BDGE at $23.5 (7/3/12 Post).

Bridge Bancorp declined 30 cents in trading yesterday to close at $19.91.

6. FISI (own: Regional Bank Basket Strategy): Financial Institutions reported second quarter net income of $6.7 million or 46 cents per share, up from 39 cents in the year ago quarter. 

The consensus estimate was for 43 cents per share.

The capital ratios are okay:

As of 6/30/12, the net interest margin was 3.89%; the efficiency ratio was 60.41%; NPLs were .7% of total loans; the coverage ratio was 213% (anything over 100% is comforting); and the return on average assets was 1.08% for the quarter.

Financial Institutions closed at $16.96 yesterday.

7. PBNY (ownRegional Bank Basket Strategy) Provident New York Bancorp reported second quarter net income of $6.2 million or 17 cents per share, up from 5 cents in the year ago quarter.

The estimate was for 14 cents per share (3 analysts contributing)

As of 6/30/12, the net interest margin was 3.59%; the adjusted efficiency ratio was 65.53%; tangible book value per share was at $7.35; NPLs as a percentage of total loans was at 2.4%; the coverage ratio was 62%; tangible capital as a percentage of tangible assets was at 9.33%; the Tier 1 bank only leverage ratio was at 8.41%; and the return on average assets was .8%.

Provident New York Bancorp fell 23 cents to close at $8.13 yesterday. My purchase was a recent add to this basket strategy. Bought 100 PBNY at $7.4

8. Bought Back 200 FOFI at $7.02 (see Disclaimer): FOFI is an unusual stock CEF. I check CEF net assets values per share usually once a day for issues that I own, and once a week for those on my monitor list.

This fund reports its net asset value weekly. As of 7/20/12, I noted that it was then selling at -23.61 discount to its net asset value of $9.19, based on a closing market price that day of $7.02. That seemed steep to me so I bought the shares back.

I have explained this fund in an earlier post: Item # 2  Bought 200 FOFI at $6.77-Sold 200 FOFI at $7.31:

2012 FOFI 200 Shares +$92.06
The fund is unusual because it has invested a large percentage of its capital with five hedge funds: Bay Pond Partners, Wolf Creek Investors, J. Caird Partners, Iguazu Master Investors, and North River Investors:

FOFI Hedge Fund Investments as of 3/31/12 (subject to change of course)

The most important one by weight is Bay Pond Partners. The compensation arrangements for those hedge funds are described  at page 34 of the First Opportunity Fund's last shareholder report.

The decision to invest in hedge funds led to the delisting of the fund's shares, which thereafter started trading on the pink sheet exchange. FOFI First Opportunity Fund

FOFI Page at the Closed-End Fund Association.

Sponsor's webpage: First Opportunity

Holdings as of 3/31/12:  Holdings About 18% of the holdings are in small banks/S & Ls.

Last SEC Filed Shareholder Report: First Opportunity Fund for the period ending 3/31/12

It is hard to see much downside risk at the moment when the discount is almost 24%.

As of 7/27/12, the fund reported a net asset value per share of $9.19, unchanged from a week ago. So FOFI missed the market rally last week, which is not a good sign.

First Opportunity Fund closed at $7.05 yesterday. 

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