Tuesday, July 15, 2008

Colonial Bancgroup (CNB) and How to Value a Bank

A reader made a comment to the post below, indicating that CNB might be worse off than its total debt and total cash numbers indicate. He is correct--almost all banks are difficult to value today, because it is almost impossible to determine what percent of the debtors will be able to pay back their loans. The reader pointed me to the following link:


He believes that CNB is a risky investment because much of its debt is mortgage-related. Banks hold many different classes of assets--student loans, mortgage loans, small business loans, life insurance policies, home equity lines, and so forth. His analysis relies on an assumption that today, any bank holding significant mortgage-related or property-related loans in markets such as Florida, Nevada, and California will be distressed. I don't dispute that analysis; however, I also do not believe CNB deserves to be trading at 3 dollars a share, even with its risks. CNB will probably not collapse and as a result, five years from now, when property values recover, CNB will be lauded for being in high-growth areas.

In any case, CNB accelerated its earnings release to July 16, 2008. We will have a better idea of where the bank stands tomorrow. I can't imagine CNB would have accelerated its earnings release if there was worse-than-expected news involved, but common sense doesn't always apply in this panicked market.


Anonymous said...

I did a little more digging around and CNB holds $6.2 billion in construction loans. That's one of the riskiest loan classes out there. Plus they just acquired a Florida bank last year (risky geography). Finally, as I pointed out, the amount of mortgage backed securities they hold - as I pointed out earlier - is over $2 billion. Check out the ABX to see what some of these might be worth. Depends largely on the year of origination but you get the idea that people don't believe even AAA rate stuff is any good.


So what MBSs CNB might be carrying on their books right now as being worth $2 billion might really only be worth $1.2. Trust me, no one is looking forward to 'fessing up to that one.

Plus, like most banks, they still have lots of exposure to regular old mortgages which we know are troubled because of falling values. I have no insight into how good/conservative their lending standards were.

I'd tread really carefully here. Since you sound like a young investor, I would recommend you move to the side lines. Or else just realize that your investment thesis boils down to a hope that we've seen some capitulation. Personally I think the risks are to the downside with this bank with $1+ billion losses still to be announced and would step aside. But there is never a bugle at the bottom either so who knows.

Good luck.

P.S. Do spend some time reading an annual report or two (previous link) in their entirety. You can learn quite a bit about a company. Pay special attention to 'risks', 'balance sheet' and 'Notes' (where much meat is often hidden).

K_Yew said...

Thank you for the advice--my holistic approach has served me well over the last ten+ years of investing, so I will continue to use it. For example, INTC, which I called as undervalued a few days ago, beat earnings. But I agree with you that as a whole, almost all bank earnings seem suspect right now. Hopefully, CNB's earnings release tomorrow will shed some light.

Anonymous said...

Me again. Hope you are using the Wells Fargo news to sell half (or more of your position). If you are still in love with this one, there should be better opportunities to buy this one again before the end of the year.

Again, good luck.