A Shovel Ready Bank

A buddy of mine asked be about a small bank today and I wanted to go through the numbers to illustrate the problems the banks face. I’m not going to name the bank or show a chart.

I wrote him the following –
Something isn’t working in their numbers for me. This is all from the 10Q dated 9/30/08, but you can extrapolate it into the latest 10Q which has not yet been filed.

They show Common Equity at $1.214 Billion
On 126 million shares, that is a Book Value of $9.36 per share
Yet the stock is trading at under a dollar a share.
Common Equity is essentially Assets - Liabilities

Why? Because something on the Asset side of the Balance Sheet is not properly priced and the markets know it.

Here is what I think it is –
Under Assets, you will find a position called “Securities Held for Sale, at Fair Value” $2.019 Billion

If you look at Note 4 of the 10Q, you see the breakdown and pricing of these securities.

$484 million CMOs priced at 96.4 cents on the Dollar
$745 million Mortgage Backed priced at 101 (above Par!)
$538 million Municipal Bonds priced at 100
$249 million Agency paper at 102 (implied backstop)

Some CMOs (Collateralized Mortgage Obligations) are trading at 6 cents.
Private origination Mortgage Backed Securities are trading way below Par (20 - 30 cents)
Try selling a Muni for Par right now. You will be lucky to get 68 cents.

So the disconnect between reality and the pricing of positions in the Balance Sheet is being reflected in the stock price.

The bottom line is this –
(the bank stock) is now a Call Option on a massive transfer of wealth from Taxpayer to Shareholder. That is what it would take to allow (the bank) to sell their holdings at the fantasy prices they show on their balance sheet.

If you think the Government will bail out this bank at Taxpayer expense, then buy the stock. If you don’t think so, then don’t buy it.

This bank’s “Balance Sheet” is “Shovel Ready”!