District Court Decision in Turkle Trust v. Wells Fargo (N.D. Cal)/Summary of Argument: JPM Potential Obligation to Pay Make Whole for its Recent 2035 TP Redemption/Other JPM Capital Trust Preferred Securities: Language on Make Whole Payment and Capital Treatment Event

This post was originally scheduled for tomorrow. Since I view it as important to the owners of GJN, who were hosed by WFC, I elected to move it up a day, and move the other post to Tuesday which deals with the usual topics.

Added: See also subsequent post: Turkle Trust v. Wells Fargo

****************

Since I am working on other matters early this week, my post will be limited today to comparing the 2035 JPM TP language on the make whole payment and capital treatment event issues with the comparable language in other prospectuses for TPs redeemed by JPM on 7/12/2012. I will also summarize the main arguments for both sides. 

This topic may be of interest to just one daily reader of this blog.

I would first emphasize that the issues discussed herein are basic contract issues. The central issue does not involve the application of securities law. Instead, the issue is a simple legal one. What does the contract (prospectus) mean using standard contract rules of construction?

I looked at some of the prospectuses for J P Morgan Chase Capital trust preferred securities that were redeemed at the same time as the underlying 2035 5.85% TP in GJN. J.P. Morgan Chase Announces Redemption of Approximately $9.0 Billion in Aggregate Amount of Outstanding Trust Preferred Capital Securities

The sole purpose was to determine whether there was similar time restrictions applicable to the capital treatment event exception to a make whole payment.

I did not look at all of the them. I am no more than an interested bystander on this issue, and it takes some time to find these prospectuses and to review them. I found one out of four with a similar issue to the 2035 TP but the principal amount was less than 1/5 of the $500M outstanding on the 2035 TP. 

As previously noted, the make whole payment for the 5.85% J P Morgan Capital XVII Series Q, the underlying security in the GJN trust, runs to the maturity date, 8/1/2035. The capital treatment event exception has a 90 day time period attached to it. More On JPM Potential Liability for a Make Whole-Redemption 2035 TP; GJN-JPM-Make Whole Payment; GJN-Wells Fargo/More on When Does A Capital Treatment Event Occur (language quoted in that post, see page A-5 of GJN Prospectus)

For comparison purposes, I took a snapshot of the make whole provision in the 2035 JPM TP and its language relating to the capital treatment event exception to a make whole payment:

GJN Prospectus at page A-5/Last Paragraph is the Critical One on TIME issue

Capital Treatment definition:

Bond owners argument: The Dodd-Frank law, signed by the President on July 20, 2010 mandated that JPM would have to phase out the use of trust preferred securities as Tier 1 equity capital. (www.paulhastings.com/.pdf; section 171 of the Dodd Frank law, docs.house.gov .pdf;

That law was the Capital Treatment Event within the meaning of the 2035 TP prospectus.

Using an objective standard, JPM or anyone else could have reasonably made that determination as of 7/21/2010.

Therefore, the ninety period for invoking a capital treatment time sensitive exception to a make whole payment expired in October 2010.

Any optional redemption after that expiration date would require the bond owners to be made whole with an optional redemption that did not fall under another exception, such as tax event. Since no other exception applied when JPM elected to redeem the 2035 TP, it owed the bond owners a make whole payment.

The bond owners would also utilize several rules of contract construction in support of their interpretation. Exceptions to general rules will be strictly construed. The general rule in this case was that JPM had to make the bond owners whole for an early redemption subject to narrow exceptions that were time sensitive. Another rule is that ambiguities in a contract are to be construed against the drafter. The 2035 TP was a JPM creation. It is also imperative to have contract clarity on the applicability of the make whole payment. Otherwise there will be continuous  market confusion and disruption on the TP's price. This consideration would be particularly applicable in periods of abnormally low interest rates when investment grade bonds with make whole provisions are being priced in excess of par value, and frequently in a substantial amount.

While I am not doing any legal research on this issue, I found a synopsis of a decision by a federal court judge who held that WFC did not have to wait until the conclusion of the phase out period and could treat the signing of the Dodd-Frank law as a Capital Treatment Event. Court OKs Redemption of Trust Preferred Securities Due to Dodd-Frank (Call v. Wells Fargo & Company, No 11-CV-05215-CW; Turkle Trust v. Wells Fargo, No. 11-CV-06494-CW; Judge Claudia Wilson presiding) The redemptions occurred on 10/3/11. I do not know whether those TPs had a similar time period limitation. The issue appeared to be whether the company had to wait until the security could not be used as Tier 1 equity before invoking the Capital Treatment Event exception to the make whole payment. The phase out period will start 1/1/13 and end three years thereafter. This was the first argument that I developed on the issue. Item # 1 When Does a Capital Treatment Event Occur?

The Court held that WFC did not have to wait until the phase out period started or ended. A thumbnail discussion of the case can be found at Turkle Trust v. Wells Fargo. The decision was filed on 7/2/2012. I did find some indication that plaintiffs have appealed the dismissal of their complaint. I could not find a copy of the District Court decision. From the brief summary available to me, it does not appear to me that the plaintiffs are making the best possible arguments that involve basic contract construction, including the ones mentioned above. If that is the case, it needs to be corrected pronto. Of course, the Second Circuit is not bound by a decision in the Ninth Circuit.

I would certainly agree with Judge Wilson that WFC could make that reasonable determination at the moment President Obama signed the bill in July 2010. That can be turned against WFC if there is a 90 day limit limit for redemption. If those TPs had a time limitation, the Court would be rendering that time limitation meaningless by giving WFC in effect an unlimited time to make that reasonable determination after 7/21/2010.  That interpretation excises the time limit out of the contract and renders it meaningless. That time limit has an important purpose and should not be deleted by a court to arrive at a particular result.   

The make whole provision is extremely important to bond owners. Its presence would have allowed WFC to receive a lower long term interest rate. If there was no make whole provision, or a make whole whose life was limited to a few years after issuance, then WFC would have had to pay a higher interest rate. 

The object of that time limitation was to create certainty in the application of the make whole provision. After 90 days, buyers and sellers should be able to trade that bond with certainty that it would be subject to a make whole payment for an optional redemption. Since anyone could have made a reasonable determination that WFC and JPM would have to phase out the use of TPs as Tier 1 equity capital as of 7/21/2010, it is irrelevant when they actually made that decision. 

(while I only have a synopsis of the decision, it would be a mistake for plaintiffs to rely on the implied obligation for good faith on this particular issue unless they first lose all of their contract interpretation arguments, including the best ones which apparently are not being made by them)

JPM: In the contract language that we wrote, it clearly states that we can continually make a reasonable determination based on anything that comes down the pike relating to the use of the TP as Tier 1 Capital. Federal Reserve Proposes Revised Bank Capital Rules — The Harvard Law School Any proposed regulation or law, and any regulation or law, that allows for such reasonable determination starts the 90 period running again and again. It does not matter that everything since the passage of Dodd-Frank is mere window dressing on the use of those TP's as Tier 1 equity capital. And, it does not matter that the Federal Reserve would just be implementing the law as enacted by Congress on this issue. In addition, the time period runs from the time JPM makes that reasonable determination, not when anyone could have made that determination. JPM made its determination in mid-June 2012. JPM could have based that June 2012 reasonable determination based on nothing more than the Dodd-Frank bill enacted into law 7/21/10.

While I am not predicting the outcome, this issue lends itself to a summary judgment for one side or the other. I am not representing anyone on this matter. I have no financial stake in the outcome one way or the other. I have been called a "mad dog lawyer" for even suggesting the possibility of this legal remedy for the GJN owners. For the former owners of the $500 million of 2035 TPs, a win on this issue would result in a gigantic payday and the GJN owners could be made whole. I am doing what I can to help those folks free of charge of course. That included contacting Floyd Norris at the NYT. NYTimes.com

Since the make whole payment could easily be calculated by anyone with the appropriate software, the amount is a liquidated sum entitled to enhancement by prejudgment interest. The make whole payment could be calculated to the penny as of the July 12th redemption date.

It would not surprise me to learn that a make whole payment for the 2035 JPM TP would be over a $100 million more than JPM actually paid to those bond owners. I have never seen such a simple case with so much money at stake.

JPM TP prospectuses, which are still outstanding, can be found at JPM's website: Fixed Income Information

While searching for prospectus, I found some JPM TPs with no time limitation that were not subject to the 7/12/2012 redemption notice. Prospectus Supplement at S-35;  At some point, JPM may have just deleted that restriction. This would be a topic that needs follow up. 

1. J P Morgan XXVII (7%): Prospectus Supplement

Redemption Within 90 Days of Capital Treatment Event Page S-18

Conclusion: As previously argued, the capital treatment event period started on July 21, 2010, when the President signed the Dodd-Frank bill, and consequently the ninety days has expired under this argument.  However, the make whole payment period ends 12/22/2014, rendering it a relatively small sum compared to the 2035 TP which runs to 8/1/2035. 

2. J. P. Morgan Chase Capital XXVI (8% Fixed-Floating): Prospectus Supplement

Redemption at Anytime after Capital Treatment Event Page S-39

Conclusion: With no time restriction, the redemption at par value plus accrued interest was proper. IN any event the make whole payment period is cut off at 5/15/13. 

3. J. P. Morgan Chase Capital XXVIII (Fixed to Floating): Prospectus at stifel.com .pdf

Redemption Within 90 Days

Conclusion: Same as # 1  above. However, the make whole payment period ends on 12/22/2014.  

4. J.P. Morgan Chase Capital XV (5.875%):  Prospectus Supplement

This one will be the same as the 2035 Prospectus:

90 Day Restriction/Make Whole Runs to 2035 Maturity

The principal amount outstanding on this one was $92,939,000.  

GJN-Wells Fargo/More on When Does A Capital Treatment Event Occur

This is my second post for today.

I understand that some lawyers may be interested in representing the former owners of GJN. I have already been contacted by one. By clicking the profile button, a reader is taken to a page where an email can be sent to me. 

I am retired with a lot of free time on my hands, one reason for this blog. 

I am not going to become involved in any lawsuit.  My involvement so far has been solely due to my outrage about how the GJN owners were treated by WFC. 

I generally do not like most lawyers. I still have an active license just in case a family member is in need of free legal assistance.  

I would hope that this case does not end up with lawyers who just want to make a fee and settle the case for an amount significantly less than $12+ million while doing as little as possible. Some class action lawyers have a tendency to focus on harvesting compensation for themselves based on a percentage of the settlement. 

I would go after the entire amount and would not let up until the clients corralled me. 

Where available, I would ask for pre-judgment interest at the statutory rate on the entire amount. In Tennessee, that could be up to 10% per annum as an element of damages. This kind of award could be appropriate in contract actions involving a liquidated sum.  

Some of the legal theories, which I have advanced so far, are based on contract law, including the implied obligation of good faith and fair dealing, cases relating to third party beneficiaries of trusts (particularly those involving the creator of a Grantor Trust taking the beneficiaries money & fiduciary duty obligations), and contract construction. The last area involves tying the make whole provision to the swap termination fee, as I explained in GJN-Wells Fargo-New York Times.  I have no expertise in securities law, but that would be an obvious area for research and further investigation. 

I also believe that lawyers wishing to investigate claims will need to focus on whether J P Morgan correctly invoked the capital treatment exception in order to avoid a make whole payment. As the beneficial owners of $27.7 billion in J P Morgan TPs, the owners of GJN should have standing to complain about the amount of JPM's payment into the trust. To understand this issue, rules of contract construction would come into play. The issue is when can JPM claim a capital treatment event when the TPs could still count as Tier 1 equity capital. (section 171 ‎housedocs.house.gov pdf)

So, if I was involved in such a lawsuit, which is not going to happen, I would seek as my ultimate objectives the following: (1) the termination of all WFC's rights in the prospectus due to securities act violations and/or material breach(es) of agreement, etc. and so on; (2) the return of the entire amount paid to WFC by the Trustee; (3) pre-judgement interest at the statutory rate on that amount; (4) a make whole payment by JPM to the owners of GJN to the extent it is in excess of the payment already made by it; and (5) attorneys fee if available by statute or under the American Rule for the award of attorneys fees. 

A make whole payment is calculated as follows:

Page A-5 of the GJN Prospectus:

"JPMorgan Chase & Co. will have the right to redeem some or all of the

Junior Subordinated Debentures at a redemption price equal to the greater of:

     o    100% of the principal amount of the Junior Subordinated Debentures
          being redeemed; or

     o    the present value of scheduled payments of principal and interest from
          the prepayment date to August 1, 2035, on the Junior Subordinated
          Debentures being prepaid, discounted to the prepayment date on a
          semi-annual basis (assuming a 360-day year consisting of twelve 30-day
          months) at a discount rate equal to the treasury rate plus a spread of
          0.25%, as determined by The Bank of New York or any successor
          calculation agent that JPMorgan Chase & Co. may appoint;

in each case plus accumulated but unpaid distributions to the date of payment.

          JPMorgan Chase & Co. may elect to redeem Junior Subordinated
Debentures at one or more times in this manner. The Underlying Securities
Property Trustee will give holders of the Underlying Securities not less than 30
days' nor more than 60 days' notice prior to the date of any redemption of the
Underlying Securities.

          In addition, at any time within 90 days after a Tax Event or Capital
Treatment Event, JPMorgan Chase & Co. may elect to redeem all, but not less than
all, of the Junior Subordinated Debentures for a price equal to their principal
amount (plus accrued and unpaid interest)."

End of Quote from Prospectus (emphasis and coloring added)

Added:

If it is possible for the capital treatment event to occur before the phase out period even starts,  which is JPM's position, then why did it not occur when the President signed the Dodd Frank law?

I took a snapshot of the pertinent prospectus language relating to the capital treatment event:

Please note how the language keys off the "reasonable determination" of JPM. If that reasonable determination could have been made when the President signed the Dodd-Frank bill, then the ninety day period expired long before JPM actually made the redemption. Would a Court give them a second chance, a third chance, etc to start the ninety days running?

While the GJN Trust owned $27.7 million of the J. P. Morgan Chase Capital XVII securities, the total principal amount of this TP was $500 million. J.P. Morgan Chase Announces Redemption of Approximately $9.0 Billion in Aggregate Amount of Outstanding Trust Preferred Capital Securities So a lot of money is involved in the make whole payment on that entire principal amount. 

There is most likely a number of cases dealing with the standard for making that "reasonable determination". I am not going to research the matter. Since the capital treatment event relevant to this issue is a new event, I doubt that any cases will be found dealing with that specific topic. Instead, a lawyer will have to draw analogies from cases in other topic areas.  

When Does a Capital Treatment Event Occur?/NXY/SOLD 50 SYBT at 24.31/ Bought 50 VFH at $31.16/Earnings: SYBT PBCT CCNE

China seems to have the same objective as our RB when it comes to Canada. CNOOC will acquire the Canadian energy company Nexen (NXY) for $27.5 (USDs) per share in cash, a 66% premium to NXY 20 trading day volume-weighted average share price. I do not own the common shares. For a time, I owned NXYPRB, an exchange traded junior bond issued by NEXEN. Bought 50 NXYPRB @ 25.15-Sold 50 NXYPRB at $25.5. This one has a 7.375% coupon on a $25 par value, with a maturity in 2043. It can be called now. Prospectus Supplement Those shares declined 28 cents to close at $25.3. Nexen Inc. 7.35% Sub Notes 2043 I suspect that the decline was due to some investors pricing the greater potential of an early call.

Normally, I would not buy a bond with a maturity after 2039, sort of an arbitrary cut-off date on the interest risk issue. For the OG, the option of holding a bond maturing after 2039 to maturity is not a realistic one. On many occasions, an exchange traded bond will be delisted when the issuer is acquired by another company. Another possibility is that CNOOC will call the bond after the merger. CNOOC has a higher credit rating than NEXEN and would have no difficulty in refinancing this bond at a lower rate.  CNOOC sold some ten and thirty year bonds back in April that were rated Aa3 by Moody's. The Nexen 2043 junior is rated junk at Ba1 by Moody's.

Nexen's common stock is owned by a Canadian energy ETF that I own. I am familiar with two Canadian energy ETFs. The Guggenheim Canadian Energy Income ETF had a 1.33% weighting in NXY. I own shares in XEG, an offering by IShares Canada that had a 3.43% weighting in NXY. I own 200 shares of that ETF, bought on the Toronto exchange, primarily for diversification and potential long term gains for this sub-sector of energy stocks. I have a positive view of Canada's energy stocks over the long term, meaning the next ten or more years. I have some ENY in family member accounts and in a testamentary trust for the same reason.

I thought that Penn State football was extremely fortunate to avoid a death penalty, lasting for at least one year. I remember that SMU football was given the death penalty after recruiting violations. The Tulane University President shut down the Tulane basketball program after a 1985 point shaving scandal.

Basically, at my core, I am a conservative, admittedly an old-fashioned one who actually believes in the Bill of Rights.

Are the values expressed in the First Amendment hard core, immutable conservative values?

The First Amendment is not a grant of rights but is instead a restraint on the government interfering with the free exercise of those rights that the founding fathers believed naturally belong to human beings (natural rights, John Locke and Thomas Hobbes)

The United States Constitution - The U.S. Constitution Online - USConstitution.net

You would think that would have some appeal to conservatives, a point to keep in mind when I later discuss a recent incident in Tennessee.

I am not the kind of conservative who would be welcomed in the modern day GOP. The vast majority of republican politicians, particularly those inhabiting the House of Representatives, are not conservatives, not even close, but something else entirely. The reactionary forces, including racists, have always called themselves conservatives. Every racist that I have known referred to themselves as conservatives.

Many republicans would probably be best characterized as reactionaries with rigid ideological beliefs formed without much effort, if any, to learn accurate information. Due to rigidity of their beliefs and a complete lack of interest in challenging them, they are incapable of learning anything worthwhile from experience. Any information inconsistent with the belief is rejected as false simply because it is inconsistent. Why learn anything, when truth is embodied in about ten cliches, probably less than that? "Government is the problem", just by way of example. That sounds like it might contain a germ of a thought, more like a single cell organism struggling to form a thought. 

In the last gubernatorial election in Tennessee, I voted for the republican Bill Haslam, viewing him to be closer to a traditional republican than other republicans politicians normally viewed as unenlightened and ignorant extremists. Senator Corker, who is up for re-election this November, is viewed as a non-crazy traditional republican, and I will vote for him. I also voted for Lamar Alexander, the other Republican senator from Tennessee. Michele Bachmann: Sarah's Soul Sister (October 2008). I will not vote for Mitt, viewing him as a pathological liar with no core principles, other than a desire to say whatever was necessary to secure the GOP nomination and to become President.   Obama is the default choice-again. At least the republicans are not likely to nominate a Know-Nothing Sarah clone, someone like Michael Bachmann or my representative, as their V-P. 

Now, in my usual roundabout way, I am now going to discuss the reason for bringing up the Bill of Rights today.

Recently, the TBs in Tennessee have gone into apoplexy after the Republican Governor's administration hired a well qualified attorney, who happens to be a Muslim, to be the International Director for the Tennessee Department of Economic and Community Development. The lady in question, who was born in Waverly, Tennessee (hardly a hot bed for liberalism), graduated from Vanderbilt and also received a J.D. from Vanderbilt. She clerked for a judge on the U.S. Sixth Circuit Court of Appeals. She was a White House fellow and worked for many years with a prestigious international law firm.  Republicans were appalled and took out an ad in the Nashville, Tennessean claiming that Haslam had abandoned conservative republican principals, which apparently does not include freedom of religion, one of the core conservative values embodied in the Bill of Rights. Haslam right to hire Muslim | timesfreepress.com

{Really, only the Second Amendment, as properly interpreted by the current Court, is needed to preserve our liberty anyway. Might as well forget about those other liberal rights such as freedom of religion except for Southern Baptists and other proper Christian denominations of course, maybe even the Methodists too. Everybody needs to just arm themselves with as many automatic weapons as they can afford to buy, yeah man, carry two or three concealed weapons, mount a machine gun on the top of our homes, possibly even a grenade launcher, flamethrower and mortar in the garage will be necessary to protect our liberty from Obamacare-with all of those weapons purchased by mail order, of course}

The republican chapter most up in arms about the Haslam administration hiring a gay person and a Muslim is of course the one from Williamson County Tennessee. Hardly surprising to anyone in the know. HQ is located in the most republican part of that county, the SUV Capital of the World.

While I have not conducted a poll of all republicans in Williamson, I believe that most of them are birthers based on my large sampling on that issue. Their state representative, Glen Casada, joined a lawsuit seeking to challenge Obama's constitutional right to be President, being a foreign born Muslim and all that other bad stuff too. 

Many voters realize that Gore lost the election to George Jr. in 2000 due to a narrow loss in Florida after the Supreme Court stopped the recount. It may not be generally known that Gore really lost the election because he failed to carry Tennessee, his home state and where he had been elected as a U.S. Senator and Congressman before becoming Vice President under Clinton. New York Times The Tennessee loss was a narrow one. There has never been any serious question about the accuracy.

If Gore had carried Tennessee, he would not have needed Florida to win. He would have been President, and there would have been no Iraq War in my opinion. In the 2000 election, Bush received 38,901 votes in Williamson County and Gore received 18,745 votes. I voted for Gore since I did not believe George Jr. was capable of exercising good judgment based on securing the best and most reliable information, a common affliction among TBs who form opinions easily based on misinformation consistent with their preconceptions.

TBs can be anyone, including liberals and Democrats. It is more of a tag that defines an unwillingness to sift through information from a variety of sources, particularly original source material, and to distinguish the reliable from the unreliable and the material from the immaterial. It is immaterial for non-TBs whether the information fits into previously fabricated belief systems, including those held over an extended period of time. The first inquiry is whether the evidence is material, relevant and reliable.  Phrases applicable to non-TBs would include inquisitive, thoughtful, analytical, discerning, and open-minded.

1. Capital Treatment Events and TP Redemptions: When Does a Capital Treatment Event Occur Within the Meaning of the Prospectus: Apparently, the banks believe that a recent notice of proposed rulemaking, published by the Federal Reserve on June 7, 2012, is sufficient to trigger a "Capital Treatment Event" within the meaning of a prospectus. An example of that belief is expressed by TCF Financial when it announced the redemption of its trust preferred. A similar statement was made by Citigroup and in a June 8th press release issued by SunTrust. Their legal beagles seem to be on the same page, but would a court agree when confronted with that argument being used to avoid a make whole payment?

I would be interested to see the legal authority supporting that position, when the rule does not start the phase out of TPs as Tier 1 equity until 1/1/13. The issue is "when" does a Capital Treatment Event occur within the meaning of a given Prospectus. That could become an important issue when a bank redeems a TP with a make whole provision in July 2012, as JPM did, and attempts to avoid the make whole provision by invoking the Capital Treatment Event exception. 

I am not questioning that avoidance when the redemption occurs after 1/1/13, provided the TP would no longer qualify under the phase out rule. Some TPs could be considered Tier 1 equity capital through the remainder of 2013, all of 2014 and even into 2015. Is the opinion of the bank's attorney binding on the court when that attorney is making a mixed law and fact judgment that inures to the benefit of his client and harms other parties?

I am just posing a few questions, rather than providing an answer on this one. I have posited the need for legal research on this timing issue in connection with the GJN redemption. If the redemption of that security is going to be litigated,  then the plaintiffs might as well question everything touching that redemption, including the amount of JPM's payment to the trust. The Egregious Swap Termination Fee Paid to the GJN Swap Counterparty

Added 8/4/2012: I discuss this issue in more detail at the end of a 8/3/12 post: GJN-Wells Fargo. The definition of a "capital treatment event" can be found at page A-6 of the GJN Prospectus. JPM only has a 90 day window to redeem after a capital treatment event and avoid the make whole payment. That window starts when JPM makes a "reasonable determination" that there is more than an insubstantial risk that it will no longer be able to treat the liquidation amount of the TP as Tier 1 equity capital. 

2. Sold 50 SYBT at $24.31 Last Thursday (Regional Bank Basket Strategy)(see Disclaimer): I was not impressed with the earnings report. S.Y. Bancorp Reports The bank reported an E.P.S. of 44 cents per share, up from 43 cents in the year ago quarter.

Since I had a good percentage profit over a relatively short time span, I decided to harvest the gain. I will also receive one quarterly dividend:

2012 SYBT 50 Shares +$107.58

After this report, Raymond James downgraded the stock to market perform from outperform, apparently based on valuation. That report had no impact on my sell decision.

3. Bought  50 of the ETF VFH at $31.16 Last Thursday (see Disclaimer): After selling some small positions in my regional bank basket, including the one discussed above, I decided to buy back the Vanguard Financial ETF (VFH) as a parking place for the proceeds. By buying this ETF in my Vanguard brokerage account, I do not pay a brokerage commission.

Sponsor's webpage: Vanguard - Financials ETF - Overview The expense ratios is listed at .23%.

VFH has over 500 securities compared to 80 stocks owned by the SPDR Financial ETF (XLF) The later ETF is limited to financial stocks included in the S & P 500, whereas VFH will include mid and small cap companies in this sector. Both ETFs would include banks, insurance companies, REITs, and investment management companies (e.g. TROW). Both ETFs include Berkshire Hathaway.

I thought that it would be useful just to compare the weighting for the top 10 holdings of each ETF:

VFH Top 10 Holdings as of 6/30/12

XLF TOP 10 as of 7/18/11

I have previously bought and sold VFH twice:

2011 VFH 100 Shares +$403.28

Sold 100 of the ETF VFH at 34.88 (February 2011). I subsequently became less brave, buying just 50 shares, and disposing of them shortly thereafter for a smaller gain:

2012 VFH 50 Shares +$92.47

Sold 50 VFH at $31.05 (February 2012)

Vanguard Financials ETF declined 27 cents in trading yesterday to close at $30.35.

4. PBCT (own: Regional Bank Basket Strategy): People's United Financial reported second quarter net income of $64.8 million or 19 cents per share, up from $51.1 million or 15 cents in the year ago quarter. During the second quarter, PBCT repurchased 4.5 million shares at a total cost of $54 ($12 per share). Operating earnings were reported at 20 cents per share.

The consensus estimate was for 19 cents.

PBCT has a network of 416 branches in Connecticut, New York, Massachusetts, Vermont, New Hampshire and Maine.

As of 6/30/12, the net interest margin 3.95% (down from 4.15% a year ago); the efficiency ratio was at 61.5% on a consolidate basis (62.4 for bank); originated NPLs were 1.67% of total originated loans; he tangible equity to tangible asset ratio was 11.5%; the total risk-based capital ratio was 15.6%; tangible book value was $8.76 per share; operating return on average assets was .97%; and the return on average tangible assets was 1.01%.

PBCT was a recent add to the regional bank basket strategy: Bought 100 PBCT at $11.47

People's United Financial closed at $11.37 yesterday, down 14 cents. According to Marketwatch, the dividend yield at that price is 5.63% with the next ex date on 7/30/12.

5. CCNE (own: Regional Bank Basket Strategy): CNB Financial Corporation reported net income of $4.3 million or $.35 per share, up from .32 in the year ago quarter. For the quarter, the return on average assets was 1.01%.

The consensus estimate was for 34 cents, with only two analysts contributing to that number.

As of 6/30/12, the total risk based capital ratio was 14.96%; the Tier 1 based ratio was 13.7%; the tangible equity to tangible assets ratio was 7.53%; NPAs stood at 1.08% to total assets; and the net interest margin was 3.47%.

Bought 50 CCNE at $11.06 (June 2010)

CNB Financial closed at $16.44 yesterday.