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In the initial revamp of the Doo Doo 32 bank list, our shortlisted banks were selected based on deteriorating fundamentals, and the idea at the time of screening was to review their solvency position, as we had screened the banks by applying filters similar to recently failed banks list.

Although widely accepted, computing adjusted P/B using the formula (tangible book + loan reserves - tax assets - fair value adjustment) could underestimate the multiple if a bank has high NPAs (non-performing assets) vis-a-vis loan loss reserves. If we want to add loan loss reserves to tangible book, we must deduct NPA as well. As a result, from a valuation point of view, conventional P/ TCE (tangible common equity) is more relevant.

Alternatively, we have computed banks' adjusted capital by adding back reserves and deducting NPAs to TCE. Based on this United Security Bancshares (NASDAQ:UBFO) and Capitol Bancorp (CBC) are clearly underwater. After adjusting for DTAs (deferred tax asset) First United is also underwater. However, adjustment for DTAs should preferably be done in the case of probable collapse wherein DTAs are not expected to be usable by an ongoing concern.

The Texas ratio (First United has relatively better Texas ratio than others, the metric drops only after adjusting for DTA but still fares better than United Security Bancshares and Capitol Bancorp which are clearly the worst of lot in terms of solvency) in conjunction with other indicators including Eyles test and Cushion ratio (all 3 ratios take into consideration allowances, TCE, NPA) point out that Taylor (NASDAQ:TAYC), United Security Bancshares, First United (NASDAQ:FUNC) and Capitol Bancorp all have a greater share of problems. However, low market cap, low share price and low liquidity could result in limited trading opportunity and thus prevent opportunity for taking advantage from their deteriorating fundamentals. The higher priced subscription only bank, who is the subject of our next forensic analysis and has a market cap of $1.3 bn and share price of about $15 also has potential problems (Texas ratio of 74% and Eyles test of 58%) that could entail a trading opportunity that benefits from deteriorating fundamentals.

The Texas ratio of 210% for First United Bank computed in the subscriber discussions is not comparable to Texas ratio of 88.5% for Taylor and other banks since it is after a haircut of 20% PPE (property, plant and equipment). The table below shows Texas ratio for all 6 banks (both after and before DTA) on a more comparable basis.

(Pls note: We have updated the table below to reflect NPA's from latest 10-Q. All other data pertaining to banks is sourced from First Call while market data is sourced from Bloomberg.)

FIRST UTD CORP

TAYLOR CAPITAL

UNITED SECURI/CA

See Subscription download

CAP BANCORP LTD

Price (September 1, 2009)

10.97

6.74

5.27

17.61

14.36

4.12

Market cap (in mn)

67.2

74.7

64.6

58.2

1264.4

72.2

P/B

0.94x

0.66x

0.86x

0.79x

0.91x

0.22x

P/Tangible BV

1.14x

0.66x

0.99x

1.37x

1.11x

0.29x

Adjusted Capital (TCE + Loan Loss Reserves - NPA's)

23,181

33,945

(23,658)

14,242

623,930

(4,298)

Adjusted Capital (TCE + Loan Loss Reserves - NPA's - DTA)

(9,877)

28,145

(34,224)

14,242

623,930

(93,598)

Loan Loss coverage YTD

2.36

0.69

0.55

4.43

3.15

-0.27

Texas ratio (NPA + 90 days past due / TCE + Allowances)

64.9%

86.4%

129.6%

77.0%

74.1%

103.8%

Texas ratio (NPA + 90 days past due / TCE + Allowances- DTA)

118.5%

88.5%

149.3%

77.0%

74.1%

137.5%

Eyles Test

55,138

216,923

60,587

28,458

821,391

303,643

Shortfall from current reserve for loan loss

40,781

83,996

44,745

22,298

659,696

189,428

Eyles Test (Shortfall as % of tangible shareholders' equity )

69.4%

74.0%

69.8%

52.7%

58.0%

75.8%

Cushion (Reserve less NPL+90 days due)

-56.4%

-50.1%

-62.9%

-37.5%

-54.4%

-60.1%

Adjusted leverage

27.5x

40.0x

11.4x

29.0x

10.4x

22.6x

NPA / Equity

79.4%

187.2%

161.6%

87.0%

59.3%

147.4%

NPA / Total Loans

4.1%

6.7%

18.9%

4.8%

6.7%

8.0%

NPL and 90 days due/ Equity

80.8%

167.2%

87.6%

52.1%

68.6%

105.8%

NPL and 90 days due/ Total Loans

4.2%

6.0%

10.2%

2.9%

7.8%

5.8%

NPL and 90 days due and 30 days due/ Equity

99.0%

181.6%

96.6%

86.9%

na

na

NPL and 90 days due and 30 days due/ Total Loans

5.1%

6.5%

11.3%

4.8%

na

na

Disclaimer: Most likely short all tickers mentioned above.

Source: Four Banks Likely to Collapse