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10 Bank Stocks Trading Below Book Value

Shares of CapitalSource (CSE) of Chevy Chase, Md. closed at $4.35 Thursday or 0.8 times tangible book value. Shares were up 6% year-to-date.

CapitalSource's main subsidiary is CapitalSource Bank of Los Angeles, Calif.

TARP Status: The company is not a TARP pariticpant.

Capital: CapitalSource is a specialty finance company, and doesn't report capital ratios in the same manner as most other bank holding companies. Main subsidiary CapitalSource Bank was well-capitalized as of March 31, with a Tier 1 leverage ratio of 11.78% and a total risk-based capital ratio of 17.35%. The holding company's tangible common equity ratio was 15.61% as of March 31, which was the highest by far for the companies being discussed here.

Earnings: Capital Source reported a first-quarter net loss of $211.7 million or 67 cents a share, after losing $869 million or $2.84 a share during 2009. As would be expected, elevated provisions for loan losses were the main factor in the losses.

Asset Quality: For the main bank subsidiary, the nonperforming assets ratio was 5.59% as of March 31. The net charge-off ratio was 2.05%, and reserves covered 6.45% of total loans. Loan loss reserves appeared adequate, even though the ratio of nonperforming loans to total loans was 9.24%.

Prospects: The decline in shares from a 2010 closing high of $6.23 on April 23 would appear to be a good buying opportunity for investors considering CapitalSource for a long-term play on the economic recovery. The stock is rated "Outperform" or the equivalent of a buy by Keefe Bruyette & Woods analyst Sameer Gokhale, who said the "sell-off appears excessive." KBW projects the company will return to profitability in the first quarter of 2011. While this is a risky play over the next year, the company's strong level of capital mitigates dilution risk and it will be well-positioned when interest rates rise, since nearly all of its loans feature adjustable rates.
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