In step with our Banks That Can Snap Back Hard article, at Stockpickr.com we set up a portfolio called Bank Stocks That Are Toast. The FDIC has publicly stated that there are 90 or so banks on its watch list for possible defaults.

Here are the requirements we used for the portfolio:

1. Increasing nonperforming loans, or NPLs. We want companies that are actually experiencing an increase in their defaults. And that are loaded with toxic subprime, prime and Alt-A paper.

2. Increased capital reserves requirements into the company’s loan loss provisions portfolio. These companies will need to raise more capital, at extremely dilutive spreads to continue their current business.

3. Widening credit default swap spreads, or CDS.

Making the Bank Stocks That Are Toast portfolio are shares of Vineyard National Bancorp (VNBC). Last week, Vineyard said that it would need to raise capital and find new sources of liquidity to continue operating for the rest of 2008

Vineyard said that customers have recently withdrawn "significant" deposits and that "conditions and events cast significant doubt on our ability to continue as a going concern."

Management said in its 10Q filings that "negative publicity relating to our financial results and the financial results of other financial institutions, together with the seizure of IndyMac Bank by federal regulators in July 2008, has caused a significant amount of customer deposit withdrawals, thus affecting our liquidity and our ability to meet our obligations as they have come due."

Vineyard’s principal markets are in Los Angeles, Riverside and San Bernardino, Calif., with about $2 billion in loans.

Shares of Vineyard are down a whopping 95% for the year.

Another name making the Bank Stocks That Are Toast portfolio is Corus (CORS), one of the largest lenders to South Florida condo projects. Corus recently announced that 42% of its condo loan portfolio is either nonaccrual or has potential problems.

Last quarter, Corus took a net loss of $16.2 million, or 30 cents a diluted share. It gained $42.4 million, or 74 cents a share, in the year-ago period. Much of its loss came from adding $58 million as a loan loss reserve account for the deterioration of its condo loan portfolio. It ended the quarter with $153 million in reserve as a loan loss allowance. “Unfortunately, we anticipate these difficulties will persist for some time,” Corus President and CEO Robert J. Glickman said.

Other stocks making the Bank Stocks That Are Toast portfolio include Zions Bank (ZION), Downey Financial (DSL) and FirstFederal (FED).

Now, we avoided breaking down the normal names in the news, including Citigroup (C), Lehman (LEH) or Washington Mutual (WM). But that doesn’t mean they are out of the woods. At the very least, there are better names to consider, such as a Wells Fargo (WFC), Wachovia (WB) or Bank of America (BAC).

The financials are volatile, and we feel there are better values out there in other more-compelling sectors.

Posted on Aug. 18, 2008