Monday, December 31, 2012

Update for Regional Bank and Lottery Ticket Basket Strategies/Added Regional Bank Basket: 40 KEY at $7.87, 30 FFBC at $14.24, 120 MNRK at $8.65 / Lottery Ticket Buys: 30 SMS at $9.26, 50 STKL at $5.85 & 30 QLGC at $8.83

This update is published on the last Monday of each month. The tables contain prices from last Friday's close. 

Before getting to the subject matter of this post, I would simply note a favorable article about LeapFrog published by Seeking Alpha. I left several comments to that article. I recently bought 100 shares in my "Flyers" basket strategy. Item # 2 Bought 100 LF at $7.86

In spite of mostly positive economic news last week, the market declined as Washington's political elite dithered on the fiscal cliff.

Last Friday's Close (12/28/12)
S & P 500: 1,402.43 -15.67 (-1.10%)
DJI: 12,938.11 -158.20 (-1.21%)
Investment Grade Bond ETF: LQD: 121.63 +0.27 (+0.22%)
Long Treasury Bond ETF: TLT: 123.31 +0.70 (+0.57%)
Junk Bond ETF: JNK: 40.55 -0.11 (-0.27%)
"Preferred" Stock ETF: PGX: 14.64 +0.01 (+0.07%)(includes senior bonds, european hybrids and other types of junior bonds in addition to traditional equity preferred stocks, see Introduction to Stocks, Bonds & Politics: Preferred "Stock" Funds and Item # 3 Preferred Stock ETFs: Bought 200 PGX at 13.53)

1. Update: Current Holdings in the Regional Bank Basket:

The strategy is explained in this Gateway Post: 

The following table does not include shares purchased with dividends. The purchase and sell prices do not include commissions. However, when a position is sold, the trade snapshot appearing in the foregoing post will contain any reinvested dividends and include commissions costs. This portfolio experienced a decline of .6% last Friday.

Regional Bank Basket as of 12/28/12

Realized Gains in this Basket Strategy 2009-2012: $9,921.43 plus dividends-snapshots at Stocks, Bonds & Politics: REGIONAL BANK BASKET STRATEGY GATEWAY POST.

A. On 11/26/12, People's United Financial (PBCT) announced that it had completed purchasing the entire 18 million shares under its share repurchase authorization. The weighted average price for those repurchased shares was $12.08. The Board authorized a new program to purchase up to 10% of PBCT's outstanding shares or 33.6M shares.

This announcement contains several noteworthy items.

First, the company actually bought all of the shares in the prior authorization announced in October 2011. Many companies may announce a share buyback but fail to complete it or even make any significant purchases under the authorization. And, very few banks are buying back their shares in this kind of volume. Some banks, like Bank of America, are not even allowed by their regulator to use their capital to buy back shares or pay more than a 1 cent per share quarterly dividend.

Second, the buyback was completed at a decent weighted average cost. I never view it as helpful for a company to buy back shares when the stock is selling at a relatively high P/E.

Third, the new repurchase program,  the fast completion of the prior one, and the existing common stock dividend tells me that this bank has capital to return to its shareholders through shrinking the share base and paying a decent common share dividend.

PBCT also sold $500M in 10 year notes with a 3.65% coupon. Pricing Term Sheet

I own 100 shares as part of my regional bank basket. Bought 100 PBCT at $11.47 (June 2012)

Last Friday's Close: PBCT: 11.97 -0.10 (-0.83%)

B. Financial Institutions (FISI-own) announced a 14% increase in its quarterly dividend to 16 cents per share. This bank did reduce its quarterly rate from 15 cents to 10 cents in the 2008 4th quarter, raised it to 12 cents in the 2011 2nd quarter, raised it again to 13 cents in the 2011 4th quarter and to 14 cents in the 2012 second quarter.  Financial Institutions Dividend History 

Bought 50 FISI at $15.55 (4/17/12)

Last Friday's Close: FISI: 18.50 -0.07 (-0.38%)

C. Added 30 FFBC at $14.24 (Regional Bank Basket Strategy)(see Disclaimer): First Financial Bancorp is a regional bank headquartered in Cincinnati, Ohio. This purchase was an average down:

2012 Add 30 FFBC at $14.24
After hitting $17.86 on 9/14/12, the shares of First Financial Bancorp have been in a waterfall type slide. First Financial Bancorp. Stock Chart

I would attribute that decline to several factors: (1) concerns generally applicable to regional banks in general involving net interest margin compression; (2) a lackluster third quarter earnings report; (3) valuation at the $17+ price; and (4) the payment of a $.28 per share dividend.

Prior to the share price slide, I did manage to trim my stake by selling 50 shares at $17.51 (Item # 3 : September 2012 Post) I did not want to buy anymore shares at over $17 so I quit reinvesting the dividend. I changed back to reinvestment due to the slide.

I still own shares bought at higher prices than my last add at $14.24: Item # 3 Added 50 FFBC at $15.95 (August 2012); ADDED 50 FFBC at $14.87 (December 2011).

This bank is paying out all of its net income in dividends until the end of 2013, unless there is a material change in its capital position. The quarterly dividend now consists of two parts: a fixed dividend of 15 cents per share and a variable dividend equal to the difference between 15 cents and the net income per share. The last quarterly dividend was $.28 per share.

At the fixed rate of 15 cents per share, the dividend yield would be about 4.2% at a total cost of $14.24. The variable dividend would juice the yield, for up to another year, to around 8.4%.

This is a summary of some key items from the last earnings report:

Net Income Per Share: $.28 up from $.27 in 9/30/11 Q.
Net Interest Margin: 4.21% (declined from 4.49% 6/30/12; 4.55% 9/30/11)
NPL Ratio: 2.41%
Coverage Ratio: 99.6%
Annualized Charge-offs to Loans= .71%
Tangible Equity to Tangible Assets: 9.99%
Tangible Book Value Per share= $10.47
Total Risk Based Capital Ratio: 18.21% (10+% well capitalized)
Tier 1 Capital Ratio: 16.93% (well capitalized 6%)
Return on Average Assets: 1.05%

SEC Filed Press Release 3Q12 Earnings

Last Friday's Close: FFBC: 14.49 -0.04 (-0.28%)

D. Added 40 KEY at $7.87 (Regional Bank Basket Strategy)(see Disclaimer): KeyCorp is a large regional bank headquartered in Cleveland, Ohio. This purchase was an average down:

My last add was the purchase of 70 shares at $8.77 (October 2012). The original purchase was made as part of the Lottery Ticket strategy. Item # 3 Bought 30 KEY at 8.75 (January 2011). Given the progress KeyCorp has made since the Near Depression, I removed the stock from the LT category and gave it a promotion to the regional bank basket strategy, which has no limit on the amount devoted to a purchase. Still, there are a lot of negatives as I discussed in the October 2012 post. Basically, I mentioned in that post that I am more optimistic about this bank over the next five to ten years than the next 0-24 months. A long term chart shows the destruction in value during the recent Near Depression: KEY Interactive Chart

I have nothing to add to my discussion in Item # 1 Added 70 KEY at $8.77 (October 2012), except that the price has declined about 10% since that purchase and is at least in theory a better long term buy now. This purchase brings me up to 140 shares, and I will be reinvesting the dividend.

Last Friday's Close: KEY: 8.35 -0.07 (-0.83%)

E. Bought 120 Monarch Financial (MNRK) at $8.65 (Stocks, Bonds & Politics: REGIONAL BANK BASKET STRATEGY GATEWAY POST)(disclaimer): I neglected to discuss this one in a weekly post. Since I always discuss adds to my regional bank basket, I decided to place a brief discussion of this purchase in this update. I did not buy 120. Instead I bought 100 and subsequently received 20 stock split shares (6 for 5). The cost number above is adjusted for that stock split. Personally, I think that it just asinine to have a stock split for shares selling at less than $10 but this small Virginia bank did it anyway. It is irrelevant since my slice of this business does not change based on stock splits. The stock did go ex dividend since my purchase for a 5 cent quarterly dividend. I have a small capital loss on the shares. So anyone can show up the OG by buying at a lower price.

Monarch is a bank holding company headquartered in Chesapeake, Virginia. It has two wholly owned banks. The first is known as Monarch Bank with 11 branches in the Hampton Roads area. The other is a division of Monarch Bank, OBX Bank, operating in the Outer Banks of North Carolina with 2 branches. The location of those branches can be found at page 5 of the following investor presentation.

SEC Investor Presentation November 2012: Investor Presentation

As noted in that Investor Presentation, Monarch participated in "TARP in December 2008 as an abundance of caution" and repaid the government in full in December 2009.

Monarch Bank was formed in 1998, and the holding company started to pay dividends in 2010:

Annual Rate:
2010: $.14
2011: $.16
2012: $.19

Near Depression Stats and Recovery: P. 26, Form 10-K as of 12/31
Net Income Per Share/NPA Ratio
2011: $.93  .85%
2010: $.77 1.3%
2009: $.67  1.4%
2008: $.21 1.35%
2007: $.66 .08%

Last Earnings Report 2012 Third Quarter:
SEC Filed Press Release:  Press Release
SEC Form 10-Q: MNRK.2012.9.30-10Q
Net Income Per Share: $.56, up 93%
Net Interest Margin: 4.3%
Efficiency Ratio (Bank Only): 52.6%
NPA Ratio: .48%
Coverage Ratio: 265.16%
Return on Average Assets: 1.43%
Net Charge Offs to Average Loans: .12%

Capital Ratios as of 9/30/12:

Last Friday's Close: MNRK: 8.22 +0.01 (+0.12%)

2. Update: Current Holdings in the Lottery Ticket Basket Strategy: Right Brain (RB) is in charge of the Lottery Ticket Basket Strategy, one designed for its entertainment, while the serious work is done by Left Brain (LB) here at HQ (home in Brentwood, TN). The strategy is explained in this post:

Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post

The preceding post contains snapshots of all trades where the gain or loss exceeded $30.

This basket declined $65.53 last Friday:

Lottery Ticket Basket as of 12/28/12

This strategy would be strangled at birth, given the small odd lots, without today's low online commissions.

Rules: Left Brain Has Boatloads of Rules-"stinking Lame Brain Rules, a voice was heard to say
Maximum Purchase Limit $300 plus any prior realized gains for each security
Total Amount of All Purchases Still Owned May Not Exceed Total Realized Gains Now
Total Realized Gains: $11,588.03
Approach: A deeply contrarian value approach. Expect a number of failures!
Holding Period: Can be until the OG is no more-particularly given the small size of each position.
Formed After Losing and Rarely Winning Anything at Powerball.    

A. Bought 30 Sims Metal Management (SMS) at $9.26 (see Disclaimer): Sims Metal Management is the largest public company in the metal and electronics recycling business, with operations at over 270 locations in more than 20 countries. While the company has its headquarters in NYC, SMS is an Australian company whose ordinary shares are traded on the Australian stock exchange: SGM.AX: 8.91 -0.02 (-0.22%) : SIMS METAL MANAGEMENT Sims files its reports with the SEC using the forms applicable to foreign companies (e.g. Form 20-F is the Annual Report rather than Form 10-K used for a U.S. domiciled company). I bought the ADR traded on the NYSE.

Company Website: Sims Metal Management Global

Sims Metal Management Profile Page at Reuters
Sims Metal Management Key Developments Page at Reuters

After hitting a high over $39 in June 2008, the stock price slid to below $8 in December of that year. Since 2008, the stock has traded mostly in a channel between $10 and $20. SMS Interactive Chart The current 52 week range is between $8.27 to $16.7

This Lottery Ticket selection is based on the usual statistical criteria along with a smashed stock price. For a patient investor, willing to hold for up to five years, there is a realistic potential for a double with sustained worldwide economic growth.

Closing Price on Day of Purchase (12/7/12): SMS: 9.33 -0.03 (-0.32%)
Key Statistics Based on 12/7/12 Closing Price of $9.33/Earnings Reports to 6/30/12
Price to Book: .21
Price to Sales: .78

ANNUAL REPORT 2012 F/Y:  20-F The company is did report earnings of AUD$192.1 for the F/Y ending 6/30/11 (diluted AUD $.938 per share), up from AUD$126.7M in the 2010 F/Y (AUD $.649 per share).  A loss was reported in the 2012 F/Y after goodwill impairment charges of $557.4M and AUD57.5M. (page 37; F-29)

The company has been paying dividends in Australian dollars, see page F-54.

Part of the potential is reflected in the earnings, reported in Australian Dollars for the following fiscal years ending 6/30: 2008 AUD $3.03 per diluted share; 2007 AUD $1.905 per diluted share; and 2006 AUD $1.646 per diluted share, see page F-2 of 2008 Annual Report: FORM 20-F)

This stock was selected using a Morningstar screen.

SMS is currently rated five stars by Morningstar with a fair value estimate of $16 per share and a consider to buy price at $9.6 or less. As noted in the Morningstar report, Sims Metal Management was created by the 2008 merger of Australia's Sims Group and the U.S. company formerly known as Metal Management.

Subsequent to my purchase, the stock was hit some after Sims Metal Management guided its F/Y 2013 EBITDA down 20% from its previous range of $110-$120M.

Last Friday's Close: SMS: 9.50 -0.24 (-2.46%)

B. Bought 30 QLGC at $8.83 (see Disclaimer): I would not profess to understand much, if anything, about QLogic's products. For a LT selection, it is unnecessary to have that comprehension. With a maximum purchase limit of $300, I am not concerned about my ignorance. Basically, the company develops and manufactures storage networking infrastructure components.

The products are described in the firm's 2012 F/Y Annual Report at page 24: Form 10-K

This selection was made using primarily statistical criteria that became more appealing after the market smashed the stock price.

During the Bubble Years, QLGC a split adjusted high of $203.25 in 2000 before coming back to earth from La La Land. (Page 10 10-k, YF historical prices are wrong). The price had moved from a low of $3.49 in the previous year.  Irrational pricing decisions are the norm rather than the exception.

After I bought these shares on 12/7/12, a SA contributor published an article on QLogic: 72% Upside . . .  Left Brain of course launched into a lecture about the lessons to be learned from Qlogic's history and has, as expected, received almost no favorable responses.

A portion of LB's lecture in the Qlogic series is captured with this snapshot:

Excerpt From LB's Lecture Series on the Madness of Crowds

Of course, our LB is not even capable of talking about such matters except in the professorial mode.  LB has sort of taken its show on the road so to speak.

Over the past five years, the stock has traded mostly in a $12 to $18 channel range. The stock was trading at over $17 earlier this year before starting a waterfall type decline in March 2012: QLogic Corporation Stock Chart The recent pricing is below the February-March 2009 lows: QLGC Historical Prices So, the stock price of less than $9 per share certainly qualifies as smashed, one of the usual criteria underlying a LT selection, looking at the chart and historical prices.

QLogic Profile at Reuters

QLogic Key Developments Page at Reuters

Key Statistics Based on $8.83 Price-Earnings ReportsThrough 4/1/12
Price to Book: 1.16
Price to Sales: 1.57
Cash Per Share: $5.44
Debt: Zero
Forward P/E 4/1/14=5.77

I highlighted the statistical criteria viewed as most important. The company is profitable and has net cash equal to 62.7% of the $8.83 market price.

For the F/Y ending in March 2014, the current consensus estimate is for an E.P.S. of $.84. QLGC Analyst Estimates

During the last conference call, the company gave a warnings about the current quarter. QLogic's CEO Discusses Q2 Results (10/25/12)

The company reported GAAP net income for its fiscal second quarter of $11.8M, or 13 cents per diluted shares, on revenues of $117.9M. Press Release Cash, cash equivalents and marketable securities were reported at $484.416M as of 9/30/12. No long term debt is shown on the balance sheet.

Form 10-Q for the Q/E 9/30/12

Form 10-K for the fiscal year ending 4/1/12

Before purchasing this stock, I did review analyst reports published by Zacks and S & P.  Understandably, the analysts had neutral ratings on the stock. S & P gave it three stars with a 12 month target price of $11.

FCF Yield Analysis:

Qlogic Market Value as of 12//21/12 (two weeks after purchase):
Minus Debt-None
Plus Cash $484.416M
Enterprise Value=422.404M

Source for Cash and Debt Numbers: Form 10-Q

FCF Numbers for Years Ending September 30th
2012: 116.6M
2011: 183.33M
2010: 146.98M

FCF Yield
Divide 148.97M Average Annualized FCF By $422.404M Enterprise Value=35.268% FCF Yield

I used the FCF numbers from YCharts:

QLogic Corporation Free Cash Flow (QLGC)

See Free Cash Flow Yields on FCF Calculation

If I had some comprehension of the products, which I do not, I would have bought this one in the The $500 to $1,000 Flyers Basket Strategy, which would have allowed a 100 share purchase at $8.83.

Last Friday's Close: QLGC: 9.55 -0.08 (-0.83%)

C. Bought 50 STKL at $5.85 (Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post)(see Disclaimer): I have bought and sold this Canadian company many times.  While LB did provide some input into the Qlogic selection, mostly to show the irrationality of Right Brains who took Qlogic's price to over a 200 P/E and $200 per share in 2000, LB refused to do anything to help the RB, who runs the LT strategy, on this purchase, saying something about giving RB some rope.

This company was initially purchased outside the purchase limitations of the LT Strategy and was demoted to LT status after making a dive toward zero.

My first two entries occurred pre-LT from 2007 and both exceeded the LT $300 Maximum plus any prior realized gains for this security:

2007 STKL Two 100 Share Lots Realized Gain=$807.93
The last sell on 11/1/2007 was a total cost of $14.5497 per share.

RB was then allowed to buy 100 shares, purchased at $1.85 in 2008. Buy of Sunopta at $1.65: Highly Speculative (December 2008). As RB barely recalls, the decline had something to do with strawberries, but why sweat the details when it is all about the future anyway. But don't quote the RB on that strawberry angle. Those 100 shares were sold at $4.06 (September 2008), a few months later RB was quick to add which goes to show who is the real star here at HQ, certainly not the Lame Brain.

2009 STKL 100 Shares +$224.04
Then there was another quickie, which was less profitable. Bought 50 STKL at 5.25-Sold 50 STKL at 6.64-LT Category

2012 STKL 50 Shares +$56.1

Total Non-LT Transactions: $807.93
Total LT Transactions: $280.14
Net Realized Gain of $1,088.07
No Dividends Have Been Paid

Headknocker is fine with what RB is doing, at least when the Nit Wit is playing with the house's money doing that vision, hopium thing or whatever it is doing now. HK does not want to know and is just happy the RB is out of the serious business end of HQ's storied trading operation.

Now, if anyone is expecting a discussion about this stock, you may be disappointed. The Old Geezer decided to help the RB out by referencing some numbers and providing a link to the last earnings report and transcript of the earnings call.

RB noted that the OG can be helpful sometimes, when compos mentis of course and relatively free of those old age issues and senior moments, but one has to take into account those brain misfire problems.

The OG tries, to be sure, but what can he do really when most of brain synapses are no longer functional, just one of those self-evident propositions like life, liberty and pursuit of happiness that Tommy Jefferson wrote about many years ago, RB noted showing off its scholarship. RB diagnosed the issue by looking at some Brain pictures.

SEC Filed Press Release 3rd Q: SunOpta
Earnings Call Transcript: Earnings Call Transcript - Seeking Alpha
Reuters Profile Page: SunOpta
Reuters Key Developments Page: SunOpta
Company Website: SunOpta - Home

STKL Key Statistics (as of 12/21/12)
Forward P/E: 11.73
P/S ratio: .34
PEG .38
PB Ratio: 1.2

Long Term Chart Reveals a Lack of Consistency: STKL Interactive Chart

A research report was published at Seeking Alpha on STKL after my purchase. That author also delves into the value of STKL's interest in two companies Opta Minerals and Mascoma, that are far beyond the scope of my discussion involving a LT purchase. I left a number of comments to that article. I would just add that STKL has had ownership stakes in those businesses since I started to buy the stock in 2007.

OptaMinerals is also traded on the Toronto stock exchange: OPM (TO)
Link to Third quarter results for Opta: ‎
Opta Website: Opta Minerals

STKL has a 66.2% stake in Opta. This stake is clearly non-strategic. Based on last Friday's close of $2.5 CAD for OPM shares, STKL's stake is worth about USD $30.0223M  (Market Cap at TSX shown at CAD $45.199M x .662= CAD $29.9217M or roughly USD $30.0223M at last Friday's exchange rate). With 65.98M STKL shares outstanding, the OPM stake is worth around 45 cents per STKL share.

Mascoma is a private company that acquired SunOpta Bio Process Inc. in 2010. ‎ Sunopta now owns an 18.65% stake in that private company. SunOpta Inc.: Form 10-Q at page 17

Last Friday's Close: STKL: 5.59 +0.03 (+0.54%)

D. A Few News Items on LT Names:  

1. LSI Logic (LSI).Tiernan Ray summarized a Wunderlich Securities report on LSI Logic.  Tech Trader Daily - That firm initiated a coverage with a buy rating and a $9 buy target, arguing that LSI should benefit from "its early entry into the NAND flash based storage market as well as its chips for wireless base stations. LSI's products are explained in its last filed Annual Report at pages 2-5, Form 10-K

Last Friday's Close: LSI: 6.92 +0.01 (+0.14%)

FCF 12 months ending 9/30/12=$241.66
YCharts: LSI Corporation Free Cash Flow (LSI)

Market Cap at $6.92 Price=$3.83B From YF
Plus Debt of = Zero
Sub-total= $3.83B
Minus Cash of $643.027M
Total Ent Val=$3.186973

FCF of $241.66M divided by EV of $3.186973= 7.58% FCF Yield

Debt and Cash Taken From Last SEC Filed 10-Q: Form 10-Q

LSI Key Statistics

2. Tetra Technologies (TTI): This stock is now trading above its 200 and 50 day SMAs, closing last Friday at $7.4. TTI Interactive Chart The fifty two week low was hit on 10/31/12 at $5.35.

The current consensus estimate is for a $.60 E.P.S. in 2012 and $.82 in 2013, a 36.67% growth rate.

Key Statistics as of 12/28/12 at $7.4 price
Forward P/E 9.02
P/S .69
P/B 1.05
PEG 5 YR EST= .44
TTI Key Statistics

TTI owns through subsidiaries a large chunk of the partnership units of  Compressco Partners, L.P. (see
Compresso Investor Presentation at page 15).

Bought as Lottery Tickets: 50 SIMG at $4.33 and 50 TTI at $5.98


  1. Have you considered FFBC TARP warrants? They expire in 2018 and adjust in strike price and conversion ratio for dividends over $0.17.

    Discussion of the warrants can be found here:

    The warrant prospectus is here (adjustment terms on S-23):

  2. Al: Thanks for bringing this warrant to my attention.

    Until I read your message, I had not looked at the FFBC warrants. I know that many banks bought those warrants back from the government while others underwent the auction route followed by FFBC.

    Unless there is some material change in capital requirements, FFBC intends to pay out more than $.17 for 2013. After that time, it may revert to its standard quarterly rate of $.15 or raise it some.

    Before I would consider the warrant, I would want to know for sure the current strike price. The prospectus says $12.9. Was that the current strike price at the time of the prospectus? And if so, what is it now. FFBC paid the variable rate throughout 2012. I did not look deep enough to find out.

    I saw the discussion at the Fairfax Board that any amount over $.17 reduces the strike price penny for penny. So if that is correct, and I did not check it, there could be some minor adjustments to the strike price in 2013, possibly more than 40 cents depending on the bank's E.P.S. numbers. Any adjustments after 2013 until 2018 would be smaller unless FFBC elected to continue its variable rate dividend. So these adjustments are important.

    I will keep an eye on it. And may study it more when I have time. I see that the warrants (FFBCW) have had no trading volume at all since a 200 share trade on 11/27/12.

    The lack of volume is a concern, see "historical prices" at Yahoo Finance. I will check tomorrow to see the bid ask spread.

    Personally, I prefer to own the dividend paying stock. My yield is high and I am reinvesting the dividend. While I get some leverage with the warrant, controlling shares at a lower price, I lose that dividend. And there will be a price range where I could lose on the warrant without making an opportune trade on it, and still have a decent return over the next several years on the stock.

    The warrant might be slightly interesting for a small purchase at less than $5. If the stock rises back above $17, the warrant would likely rise too. The warrant would probably have a bigger percentage rise which is what makes it interesting as a trade.

    I received today both the FFBC fixed and variable dividends buying 2.099 shares with them, total cost of $13.387. The last 30 shares was bought after the ex dividend date.

    The variable dividend has been paid since the third quarter of 2011:

  3. Al: I thought that I would check FFBC's SEC filings before calling it a day.

    The bank is filing in Form 8-K the notice to the warrant owners

    The strike price is now at $12.343.

    This is an excerpt from the last filing:

    On December 12, 2012, First Financial Bancorp. (the Company) notified the warrant agent, Registrar & Transfer Company, as well as The Depository Trust Company, of an adjustment to the exercise price of warrants to purchase shares of the Company's common stock expiring December 23, 2018 (the Warrants) pursuant to the Warrant Agreement (the Agreement), dated as of June 2, 2010, between the Company and Registrar and Transfer Company and to the form of Warrant Certificate included as Exhibit A to the Agreement (the Certificate). Capitalized terms used but not defined herein have the meanings ascribed to them in the Agreement or the Certificate.

    On October 23, 2012, the Company's Board of Directors declared a quarterly dividend of $0.28 per share of Common Stock, payable on January 2, 2013, to shareholders of record at the close of business on November 30, 2012.

    These dividends trigger a requirement under Section 12 of the Certificate for adjustments to the Exercise Price and the Warrant Share Number. Accordingly, the Company gave notice to Warrant holders that, effective at the close of business on December 12, 2012, the Exercise Price had been adjusted from $12.436 to $12.343.

  4. I have to disagree with the Fairfax board regarding the nature of the adjustments. Rather than a $/$ relationship, the strike price is multiplied by (Market Price before adjustment less Dividend Outlay in excess of the "Ordinary Cash Dividend", or $0.17 quarterly) divided by the Market Price before adjustment.

    Then the warrant conversion ratio is adjusted by the old strike divided by new strike. However, exercise of the warrants results in a cash outlay for those partial shares. It's also a cashless exercise; issuable shares are withheld in lieu of cash payment.

    There are pros and cons to the TARP warrants. For example, adjustments are treated as dividends for tax purposes, although I don't know how the IRS calculates liability. Even so, these are weird securities that offer interesting way to obtain no recourse leverage.

    This site provides a handy list of publicly traded warrants:

  5. Al: I noticed when I pulled that information from the 8-K last night that the adjustment could not be penny for penny over 17 cents since the adjustment was 9.3 cents and the excess over 17 cents was 11 cents. I looked at the obtuse calculation provision this morning before a cup of coffee and I believe that you are correct. I just would not do that calculation myself and would just follow what is happening in the 8-K filings.

    Your discussion about the tax issues caused my eyes to roll back into my head, so I would not want to deal with the issue at all which would require me to purchase this security in an IRA. I manage my father's testamentary trust which has an accountant and I don't mind giving him all sorts of issues.

    This is not the kind of security that I purchase in the retirement accounts, since they are limited almost exclusively to high current yielding securities.

  6. FFBC's stock price declined 2.77% or 42 cents to close at $14.76 today (1/9/13). The apparent reason was that Barclays downgraded the stock to underweight and reduced its price target to $14 from $17. I do not have access to that report.

    There still has not been a trade on the warrant FFBCW since 11/27/12. As I suspected, the bid/ask spread has been extremely large on a percentage basis.

    To trade this warrant, it appears that it will be necessary to wait for a motivated seller to emerge which may have been the case on 11/8/12 when 19,300 shares traded in a 4.8 to 4.95 range. An unfavorable earnings report could be the precipitating cause.