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I received this message the other day through the messaging system in my site:

I read your article from early Sept about the next four banks likely to fail. I [am] writing to let you know we filed our thrid quarter call report but more importantly, we are filing our earnings release today, It should be out there within the hour. I know your article was based on call report data and you can't base your analysis on other factors that you don't have, but I think the title of your article was a stetch and way too provacative. It probably helps sell your services but is a great diservice to those struggling daily to clean up the mess. I hope after your read the new informtion you'll write an article closer to reality and retract anything you may have said that isn't likely. Thanks, Very Interested Party, United Security Banchares "UBFO".

I removed his identity since he contacted me privately and didn't expressly communicate he wanted his opinion published. He is far from a disinterested party though, and is referring to an article that I wrote on the Doo Doo banks in September, "More Doo Doo Banks Available to the Public". For those of you who do not know, I used this term to coin the list of banks that I predicted may hit the fan in the spring of 2008 - "see 32 banks in deep doo-doo". If one peruses the list of the Who's Who in Doo Doo, one can see that it appears that I had a valid point as many of those banks collapsed or had to be rescued. In re-reading the article, I don't think the title of the article was a stretch at all, nor too provocative, considering the path of previous banks with similar metrics have taken. In addition, I never said these banks were likely to fail. They are in trouble, though. I understand his point, but I do not agree with it. I am sure if he viewed this from outside the bank as compared to inside, he would consider his bank's numbers to be precarious as well.

Now, let it be known that I am a disinterested party here. I simply scanned the numbers for a list of banks that appear to have significant credit issues. I also do not have a position in this company, long or short, thus I feel I am more likely to be objective than the person who wrote the note above. Ironically, the bank who was to be the subject of the forensic analysis turned out to be one of the healthiest of the bunch (still unhealthy, but relatively healthier than many in the group it was presented with), thus at this time we have postponed moving forward with it.

Alas, to be fair I did have the guys go over the latest numbers as per this reader's request and this is what we concluded:

As of the most recent quarter, the company came into profits of $0.7 mn in 3Q09 against a loss of $1.3 mn in 3Q08 primarily because of reduced provisioning for loan losses . Provision for loan losses were 0.4 mn in 3Q09 against 6.4 mn in 3Q08. The bank’s net interest income declined 3.6% (y-o-y), non-interest income declined 36% (y-o-y) and non-interest expense increased 31% (y-o-y). Below is a trend matrix for the various credit ratios.

Credit ratios





Gross charge-off rate (annualized)





Net charge-off rate (annualized)





Provisioning rate (annualized)





NPL as % of total loans





Other real estate owned as % of total loans





NPA as % of total loans





90 days past due as % of total loans





30 days past due as % of total loans





Allowance for credit losses as % total loans





Texas ratio





Following are our key observations –

  1. In 3Q09, the provisioning rate reduced to 0.3% of total loans from 5.0% in 2Q09 while the gross charge off rate increased to 1.4% from 1.1% in 2Q09. Consequently, the allowance for credit losses shrunk to 2.7% of total loans from 2.9%
  2. While the allowance for credit losses declined owing to lower provisioning, the non accrual loans, 90 days past due loans and 30 days past due loans all continued to increase. Non accrual loans increased to 10.35% from 10.25% while the 90 days past due loans increased from 0% to 0.12%. The 30 days past due loans saw the maximum jump reaching 1.37% of total loans from 1.06%. The excess of NPLs over allowance increased to 7.64% of the total loans from 7.36%
  3. Although the non performing assets declined from 17.01% of total loans to 16.88%, the decline was owing to decline in other real estate assets which were disposed off by the company, largely at a loss. Management cites the sale of property worth $9.5 million at loss of 4.8% in 3Q09. The Management also says that post 3Q09, the bank will sell 21.6 mn of properties at a loss of 1.7%. In 3Q09, the Bank’s write downs on foreclosed properties and expenses on foreclosed properties increased by 0.8 mn and 0.9 mn, respectively. This is actually a very interesting trend to note. The banks get these properties at significant discount to market retail, yet somehow still take a loss upon liquidation. This goes to show how low property values can actually drop.
  4. While the credit metrics continued to deteriorate, the improvement in Texas ratio is primarily because of an increase in tangible equity coming from the reduction in unrealized losses on investment securities and reduction in intangibles.

I am not sure why the interested party quoted above feels I should post a retraction based upon the metrics above, unless the sole reason is because he is an interested party. From what I can discern, the accounting provisions for losses were reduced in the face of an increasing trend of credit quality deterioration. If he came from an accounting background, it is possible that he feels the reduction in provisions is a reason to rejoice. While that may be a plus from an accounting earnings perspective, it is counter-intuitive and apparently in error from an economic or prudent owner/investor perspective - at least in my opinion. If I am somehow reading this wrong, I welcome any and all to point it out to me and if valid I will gladly post it publicly on my blog.

I do believe I am a fair arbiter of value and am not out here with an agenda.