The Banking Sector Isn't Out of the Woods

Today I will give an update on community banks, as five more were shuttered last Friday. We have a new category for some community banks; I will call them “deadbeat banks” - those that received TARP money, but are not making payments to US taxpayers. Big banks still have huge exposures to derivatives.

Over the past two weeks, eleven community banks tapped the TARP, while eight banks failed.

Most failures are small banks overexposed to C&D and CRE loans according to regulatory guidelines established in December 2006, and since ignored by the US Treasury, Federal Reserve and FDIC. This was true for all five banks seized by the FDIC on Friday. The number of failures for the first half of 2009 is 45 and 70 since the end of 2007 when the "Great Credit Crunch" began.

The Deposit Insurance Fund was depleted by another $264.2 million cutting the fund to just $6.4 billion, as the total for the 45 closures is up to $12.5 billion.

Some small community “deadbeat banks” are not making TARP dividend payments.

A Treasury spokesperson said that “a number of banks” that received taxpayer-bailout funding via the TARP are no longer paying dividends to the government. I would like full transparency on this list, because one of my predictions was that many banks that got TARPed would eventually fail anyway.

Pacific Capital Bancorp (PCBC) received $180.6 million from TARP in November then posted a net loss of $49.7 million, and now they suspended dividend payments on its common and preferred stock. PCBC is on our list of "problem banks" with a STRONG SELL rating and an overexposure to nonfarm nonresidential real estate loans.

Seacoast Banking Corp (SBCF) receiver of $50 million in TARP bucks, and Midwest Banc Holdings (MBHI) receiver of $84.8 million also halted their TARP-related dividends, citing the banking industry’s turmoil and a desire to fortify their balance sheets. Both are on our list of "problem banks". SBCF rates a STRONG SELL and MBHI in unrated, and both are overexposed to construction & development loans and CRE loans.

Our regulators were lax with regard to setting up standards for giving away taxpayer TARP funds.

The Treasury is taking a cavalier attitude respecting the contractual rights of TARP recipients to make decisions about dividend distributions. I say it’s just another sign of a failing government program to help banks, while ignoring the homeowners and consumers they serve. According to Treasury, banks are not in default until they miss up to six payments. Not so for homeowners and consumers.

As I have been saying consistently, most small banks that received TARP donations should not have because of their overexposures to C&D and CRE loans. The December 2006 regulatory guideline established jointly by the US Treasury, Federal Reserve and FDIC has been totally ignored.

Our banking regulators totally botched the give-away of nearly $700 billion. In addition, it was political influence among members of Congress that allowed regulations to be ignored in giving taxpayer money to weak banks, when the program was to help strong banks replenish lending.

Finally, did you know that the big banks still have huge exposures to derivatives?

The Office of the Comptroller of the Currency reports that the credit exposures of our biggest banks ended the first quarter at $1.42 trillion, up 9% year over year. JPMorgan (JPM) leads the list with $462 billion followed by Citigroup (C) with $264 billion, Bank of America (BAC) with $213 billion and Goldman Sachs (GS) with $206 billion.

The Q1 FDIC Quarterly Banking Profile shows that the total size of the notional amount of derivative contracts stands at $203 trillion, up 12% year over year.

Disclosure: I have no positions in the stocks mentioned.

Comments

[Davewmart:]

None of this is by accident.
POSIWID - the purpose of the system is what it does.
There is a fine interview with Jeff Gates here:
www.opednews.com/artic...

This in my view makes clear how the ruin of the World economy came about, and how the money men took over the intellectual space to engineer profit for the elite.

Jun 30 04:18 AM

[cholmley:]

And finally did you know that Seeking Alpha still hasn't got a contributor who knows the difference between gross and net exposure.

After a period of massive market dislocation it is obvious that gross contracts written in derivatives would rise, people are hedging their derivatives risk with, guess what, derivatives and by doing so reducing their net exposures.

Read my other comments if you care, otherwise its just the same old headline expressed as 'shock' and 'horror'.

Jun 30 07:52 AM

[Mark54:]

Scary to think when the next tier of banks start to fail... There are a number of banks >$10 billion in assets teetering on the edge. New capital sources are drying up and I have to think that eventually the markets are going to turn thier back on these institutions.

I ran a quick query on bank holding companies 10-50 billion in assets that have >4% of assets that are 90 days past due or nonperforming. There are 14 banks totaling just under 270 billion in assets. These banks have only built loan loss reseverse to cover on average 34% of these assets. Far too low considering where real estate values are now... not to mention where values are headed if there is a wave of forced selling from these banks.

Jun 30 08:02 AM

[disaster2008:]

I would like to hear more from the author on the gross vs. net exposure distinction mentioned above by cholmley.

Jun 30 01:08 PM

[Griller:]

Well now, the author does not cite FAZ in the subheader list of potentiall affected stocks, but at $4-5 FAZ is looking like a cheap hedge, even a good mid-term hedge (weeks/months not overnight or days). Even a small purchase of 50-100 shares could provide cheap insurance against a major drop--a good hedge even for the average American's 10k portfolio. After all, the spring pop in housing numbers was a hollow dud when you look beneath the headlines, which will erode banks' balance sheets. Employment? fuggedaboutit. Obama has blown pick and shovel reconstructive measures and now it is too late. Remember this crisis begins and ends with real estate. Could very leave the inverse-ETF bashers like Cramer with egg on their faces, especially now with political oppposition to bank bailouts and the Fed running out of ammo. Biggest risk? Fed intervention intended to limit returns to shorters.

Jun 30 01:57 PM

[Victor84:]

The little banks can go under, it's part of the healthy business cycle. When the big banks go down, it has a magnified impact due to the sheer amount of derivatives tied to these institutions. It is much more liquid and "safe" for both hedgers and speculators to trade against these big banks. In addition, there is a crisis of panic when one of them topple. As the big banks have been stabilized and have sufficient Tier 1 capital for Depression levels, we should be able to keep moving forward over time. The continued deterioration of assets will not make most of these banks insolvent. Banking is one of the easiest and most profitable businesses if you don't do stupid stuff (think of how 70% of restaurants fail within 2 years).

Jun 30 02:19 PM

[FloridaBoy2:]

Thanks for the article.

The small weak banks will be absorbed by stronger regional banks.
There will be money to be made picking the right ones.

Money will be made unwinding the derivitives too, I am not sure who is going to benefit from doing this yet.

Jun 30 03:03 PM

[specks:]

Nice to have found you again. I respect your insights and opinions and will look forward to more of your views in future.

Jun 30 05:10 PM

[Mad Hedge F...:]

No kidding. I have really been avoiding financials for the last few months after they had their dead cat bounces. However, I had to listen to Midsouth Bank CEO Rusty Cloutier when he spoke on CNBC. His 24 branch bank, with a market cap of only $103 million, is based in Lafayette, LA, one of my old stomping grounds and home of the world’s greatest étouffée and shrimp gumbo. He says that “Unless we break up the big banks and get back to sound banking principles we are going to relive this over and over again….Free enterprise has to have the right to fail….Allan Greenspan and his administration have some problems they have to ‘fess up to.” With the current system of megabanks “they get the gain and we get the pain….I’m regulated now by 13 agencies of the US government and I don’t know that I need a 14th.” There’s no one who can read you a riot act like a Southern regional banker.

Jun 30 05:53 PM

[bajappraiser:]

Even if just a fraction of the 203 TRILLION fails.....it will STILL cause catastrophic failure throughout the entire system....Just Damn

Jun 30 07:10 PM

[bajappraiser:]

Looks like good times are a comin'

Jun 30 07:12 PM

[Jett:]

This is a financial coup d etat orchestrated by Wall ST in conjunction with the U.S. treasury to consolidate power

into the hands of the people that caused the problem in the first place, such as JP Morgan Chase (originator of

credit derivatives) and Goldman Sachs

Alt A and Option Arm loans-reset-the entire recovery-based on accounting fraud

Alt A and Option Arm loans will reset soon. And don't forget the entire recovery has been based on accounting

fraud- namely credit value adjustments.

Jun 30 09:30 PM

[Jett:]

This guy know how to talk...and make real use of Youtube...

walstreetpro2.blogspot.../
Click Here

Jun 30 09:31 PM

[Jett:]

Last week's question was "Are you more optimistic about your business now than you were 90 days ago?" Exactly one quarter, 25%, of you replied that yes, you feel more hopeful about the future of your business than you did last quarter. This is a substantial drop from last quarter when just a little over half, 51%, responded positively. These are our lowest numbers in the last six months. We'll see if optimism rebounds or pessimism reigns when we ask this question again in three months.

This week's question is "Has your company increased its marketing spending in the past 90 days?" As always, we'd love to hear what you think. Be sure to give us your input by clicking on the survey form on the left-hand side.

Are you more optimistic about your business now than you were 90 days ago?
This Week 13 Weeks Ago 26 Weeks Ago 39 Weeks Ago 52 Weeks Ago
Yes No Yes No Yes No Yes No Yes No
7 21 46 43 32 20 16 50 24 50
25% 75% 51% 48% 61% 38% 24% 75% 32% 67%

This week's question is "Has your company increased its marketing spending in the past 90 days?" As always, we'd love to hear what you think. Be sure to give us your input by clicking on the survey form on the left-hand side.

The main (economic) event of the week is this Friday – that’s when the Department of Labor releases its June unemployment report. Residential servicers and loan modification experts know full well the corollary between the unemployment rate and mortgage delinquencies. The jobless rate hit a 25-year high of , jumping from 8.9% in April. Will the jobless rate cross the 10% threshold? As for the job market in SoCal, he said that his firm recently advertised for a bi-lingual debt collector. Within three days he received 75 applications for the job...

Lennar Corp. of Miami, the third-largest home builder in the U.S., reported a wider second-quarter loss as sales fell and the company wrote down land it no longer plans to build on.



Delinquencies Rise at Freddie Mac
June 26, 2009

Freddie Mac said loan delinquencies on its portfolio and guarantee book of business rose to 2.01% in May, an 8% uptick from the previous month, but a 229% increase from the same period last year.

Jun 30 09:32 PM

[Jett:]

Last week's question was "Are you more optimistic about your business now than you were 90 days ago?" Exactly one quarter, 25%, of you replied that yes, you feel more hopeful about the future of your business than you did last quarter. This is a substantial drop from last quarter when just a little over half, 51%, responded positively. These are our lowest numbers in the last six months. We'll see if optimism rebounds or pessimism reigns when we ask this question again in three months.

This week's question is "Has your company increased its marketing spending in the past 90 days?" As always, we'd love to hear what you think. Be sure to give us your input by clicking on the survey form on the left-hand side.

Are you more optimistic about your business now than you were 90 days ago?
This Week 13 Weeks Ago 26 Weeks Ago 39 Weeks Ago 52 Weeks Ago
Yes No Yes No Yes No Yes No Yes No
7 21 46 43 32 20 16 50 24 50
25% 75% 51% 48% 61% 38% 24% 75% 32% 67%

This week's question is "Has your company increased its marketing spending in the past 90 days?" As always, we'd love to hear what you think. Be sure to give us your input by clicking on the survey form on the left-hand side.

The main (economic) event of the week is this Friday – that’s when the Department of Labor releases its June unemployment report. Residential servicers and loan modification experts know full well the corollary between the unemployment rate and mortgage delinquencies. The jobless rate hit a 25-year high of , jumping from 8.9% in April. Will the jobless rate cross the 10% threshold? As for the job market in SoCal, he said that his firm recently advertised for a bi-lingual debt collector. Within three days he received 75 applications for the job...

Lennar Corp. of Miami, the third-largest home builder in the U.S., reported a wider second-quarter loss as sales fell and the company wrote down land it no longer plans to build on.



Delinquencies Rise at Freddie Mac
June 26, 2009

Freddie Mac said loan delinquencies on its portfolio and guarantee book of business rose to 2.01% in May, an 8% uptick from the previous month, but a 229% increase from the same period last year.

Jun 30 09:35 PM

[ifuwish2:]

does anyone ever think they want all the small banks to fail so they only have the big banks left..remember the more bandks that close the bigger the bigger banks get..scary but true,,why i own stock in the 2 big to fail banks

Jun 30 09:49 PM

[Teebox:]

He refers to PCBC's exposure to nonfarm nonresidential assets. Their exposure is 43-45% of which 69-72% of those assets are tied to Medical. As someone who works in the CA commercial real estate field the Medical market has been and will remain the one bright spot throughout this slowdown. That being said the CA commercial market is showing signs of flattening rents and new buyers coming back into the market already. Large institutions are shopping..many with large funds behind them. Bloomberg also reported that the CA commericial market was one of the strongest markets in the country.

Jul 01 12:33 AM

[Teebox:]

I need to clarify my last reply. The percentages apply to PCBC's non performing loans, so the largest weak spot is in their medical area which should be the first to correct considering the aging population.

Jul 01 09:45 AM