Four Banks Likely to Collapse

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 (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 (TAYC), United Security Bancshares, First United (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	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.

Comments

[granger:]

great as always, thank you

Sep 09 12:57 PM

[Madman:]

and where does he work at an options company specializing in shorts


On Sep 09 12:57 PM granger wrote:

> great as always, thank you

Sep 09 01:22 PM

[Reggie Midd...:]

Madman: I work for myself, and I am net short or neutral because I feel the market is heavily bubbled. No secrets or conspiracies here. Follow up and check my research, and you will find that I have some very valid points.

I have called dozens of company collapses, implosions and failures over the last two years that I have been posting publicly on my blog. I can tell when a company is overvalued - or undervalued.

Sep 09 04:20 PM

[Northstar10000:]

Reggie,
You're OK bud. What think you of AMZN. I shorted it just over 80..

Sep 09 08:18 PM

[cookerman:]

in solely going by the numbers and failing to add any element for the quality of the human resource element your ability to foresee collapses will only be as good as the lack of backround checks you lazily fail to do.


On Sep 09 04:20 PM Reggie Middleton wrote:

> Madman: I work for myself, and I am net short or neutral because
> I feel the market is heavily bubbled. No secrets or conspiracies
> here. Follow up and check my research, and you will find that I have
> some very valid points.
>
> I have called dozens of company collapses, implosions and failures
> over the last two years that I have been posting publicly on my blog.
> I can tell when a company is overvalued - or undervalued.

Sep 09 10:02 PM