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In response to subscriber comments, inputs and questions (See the discussion here and here), I am releasing this clarification for subscribers: Doo Doo shortlist addendum Doo Doo shortlist addendum 2009-09-03 16:55:20 136.41 Kb.

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. In the first installment of the revamped Doo Doo series, we released a template of the characteristics of the banks iver $1billion in capital that were shut down by the FDIC over the last year. The banks in the new Doo Doo list are being superimposed over that template.

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 NPA's 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 valuation point of view, conventional P/ TCE is more relevant.

Alternatively, we have computed banks' adjusted capital by adding back reserves and deducting NPA's to TCE (see the extensive table in the subscriber download). Based on this United Security Bancshares and Capitol Bancorp are clearly underwater.  After adjusting for DTA's (deferred tax assets), the other subscriber content  bank is also underwater. However, adjustment for DTA's should preferably be done in case of bankruptcy where DTAs are not expected to reverse back.