The OSBCP preferred has a $10 par value and a 7.80% cumulative dividend. The past due dividends also earn interest at 7.80%, so the 10 past due dividends as of Dec. 2012 would be worth $2.13 per share. The implied value of OSBCP preferred is then $12.13 per share as of Dec 2012. March 2013 the implied value would $12.37. Each quarter the amount would increase, until the middle of 2015, the total of par + dividends would be $14.71 per preferred share.
The bank will have to deal with this preferred at some point in the future, although they can continue to defer the dividends for another 10 quarters before they would be in default.
The likely ways to deal with the preferred are:
1) pay the past due dividends and continue paying on a go forward basis.
2) offer some kind of exchange of common shares for preferred. They would have to offer some amount of common that would be near the $12 value in ordered to get people to tender.
3) sell the bank to a larger and financially stronger bank that would assume the obligation of the preferred and the 'new' bank would pay the past due dividends and continue paying on a go forward basis.
I think options 2 and 3 would be most likely, unless the bank starts reporting large profits in 2013, then they could be in a position to pay the past due dividends sometime in 2014 or early 2015, before they would be in default in the later part of 2015.
Just one word of caution if you are new to buying trust preferred stocks with deferred dividends. If you buy it in a taxable account, your broker might send you a 1099 OID statement at the end of the year that will list the amount of deferred interest that accrued during the year. This amount will need to be reported as interest income and will be taxable. You would then use that same amount to increase your reported cost basis of the stock when it is sold, so you don't end up paying tax on the accrued dividend a second time. If you buy and sell frequently, this can be a big hassle to do the proper reporting come tax time.
If you buy the trust preferred in a IRA, then there is no reporting issues come tax time.
Some of the officers of OSBC bought $500,000 of the TARP debt that was recently auctioned off.
The trust preferred OSBCP is more senior and should end up being money good in the long run.
PALMER GERALD Director 03/11/2013 Buy indirect 567 352.5000 567
SCHMITZ JAMES C Director 03/11/2013 Buy direct 200 352.5000 200
LADOWICZ JOHN Director 03/11/2013 Buy direct 283 352.5000 283
ECCHER JAMES Officer 03/11/2013 Buy direct 120 352.5000 120
BONIFAS EDWARD Director 03/11/2013 Buy indirect 284 352.5000 284
Another up day for the common and OSBCP preferred hit $9 today. Still trading at a big discount to the $10 par value, plus the $2.37 past due dividends.
I only own the preferred, and if you like similar type of value plays you should take a look at FSB-pa, IBCPO. Both are bank trust preferred trading at a discount to their Par value plus past due dividends. You can find a lot of good discussion on the FBS-pa board.
Very good summary by WTH. There is one more option to discuss. OSBC is close to returning to to profitability and might be in a better position to raise capital by selling common shares in the next few quarters. The potential need to raise capital by selling common shares is one reason to consider OSBCP instead of OSBC as dilution could hurt the stock price.
If an exchange offer of OSBC for OSBCP is made, the terms of this offer would almost certainly favor OSBCP over the common. OSBCP is debt and many debt holders don't want to own equity. A generous exchange offer would be required. This is another reason to consider owning OSBCP instead of OSBC.
OSBCP is a good issue and in fact there are a few other similar deferred interest trust preferred issues from other regional banks to consider as well. FBS-PA, IBCPO and HGUBP all trade at offer high rates of return assuming that the deferred dividends are resolved.
I do a newsletter and email alert service for subscribers that covers distressed debt and preferred stock issues such as OSBCP, FBS-PA, IBCPO, HGUBP and others. As part of the newsletter I have modeled many of these issues in Excel. You can see the deferred interest for OSBCP and other issues calculated to the penny on a daily basis. My yahoo email is mrpanick if you'd like a sample newsletter issue and the excel models.