Community Bank Failures Do Matter

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Includes: IAT, IYR, KBE, KRE, QABA, RKH
by: Richard Suttmeier

Stress in the banking system continues unabated. Subscribe to the ValuEngine Quarterly FDIC Report, which will be updated in early April. Statistics for the failed banks that were included in the ValuEngine List of Problem Banks. Comptroller of the Currency John Dugan says that the banking agencies will issue new and tougher standards. Today I look at the weekly charts for the Housing and Banking Indices.

Stress in the banking system continues unabated. On Monday, I wrote about the 74 Deadbeat Banks that reneged on their February 16th TARP dividend payments. Today, I present statistics about these Deadbeat banks that are publicly-traded, took TARP funds, failed to make dividend payments, and are overexposed to Construction & Development loans and / or Commercial Real Estate loans. These are the banks that should have never received taxpayer money in the first place, but they did because the US Treasury, Federal Reserve and FDIC ignored their own regulatory guidelines and shirked their fiduciary responsibilities.

Candidates for the ValuEngine List of Problem Banks are the publicly-traded banks that are overexposed to C&D and CRE loans. At ValuEngine we update this list both quarterly and monthly adding in the ValuEngine data points including ratings, and those rated SELL or STRONG SELL make up the primary ValuEngine List of Problem Banks.

At the end of the third quarter of 2009 there were 749 publicly traded FDIC-insured financial institutions overexposed to C&D and / or CRE loans. These banks had $151.9 billion in assets, $16.5 billion in C&D loans, and have a pipeline that’s 78.1% funded. Of these, 35 were Deadbeat Banks including two that failed. This group of banks had assets of $71.6 billion, $9.9 billion in C&D loans and a loan pipeline that was 83.9% funded. Remember that a 60% pipeline is considered normal or healthy.

At the end of the fourth quarter of 2009 there were 748 publicly traded FDIC-insured financial institutions overexposed to C&D and / or CRE loans. In total these banks have $165.4 billion in assets, $16.9 billion in C&D loans, and have a pipeline at 78.2% funded. Of these, 48 were Deadbeat Banks. This group of banks have assets of $87.5 billion, $9.5 billion in C&D loans and a loan pipeline that is 84.2% funded. It is clear to me that the Deadbeat Banks should not have received taxpayer money in the first place.

Failed Publicly-Traded Banks that were on the ValuEngine List of Problem Banks – At the end of the third quarter 2009 there were 38 bank failures that were on the ValuEngine List of Problem Banks. Total assets were $92.4 billion with $17.9 billion in C&D loans and a pipeline at 91% funded. At the end of March 2010 this list has increased to 42 bank failures with $93.8 billion in assets, $18 billion in C&D loans and a pipeline at 91% funded.

Comptroller of the Currency John Dugan says that the banking agencies will issue new and tougher standards. This seems to be a day late and billions of dollars short.

New regulatory guidelines being considered include; tougher loan concentration caps, increased capital requirements, and tougher underwriting standards. In a speech in Orlando, Florida, Mr. Dugan stated,

While the concentration guidance we issued in 2006 was necessary — even though it was opposed by many parts of the industry — in retrospect, it has obviously not worked as well as we would have liked.

They didn’t work because the US Treasury, Federal Reserve and FDIC ignored the guidelines.

CRE lending including C&D loans is the leading cause of bank failures as I predicted way back in April 2006, well before the December 2006 regulatory guidelines were finalized. CRE loans account for more than a third of the loans on the books of troubled community banks. When you slice and dice the smaller banks with $500 billion to $2 billion in assets these loans are about have the books of business.

Community bank failures do matter, not only in the cost of bank failures, but also they hurt Main Street with job losses, reduced incomes, lost local tax revenues, drains on the Deposit Insurance Fund, and higher costs to other banks through assessments to replenish the insurance fund.

Continued weak housing data and strong demand for US Treasuries will frame an economic backdrop that shows lack of follow-through to the Q4 GDP growth of 5.9%. With stocks overvalued and indices overbought on daily charts, the Dow is due for a stumble. This is why my longer-term prediction is Dow 8,500 before 11,500.

Housing Sector Index (HGX) has a positive weekly chart with the index up 9.1% year to date. HGX is approaching weekly resistance at $112.41 in front of the existing and new home sales data out today and tomorrow. The five-week modified moving average is $106.49 with monthly resistance at $120.36.

Click to enlarge

Chart Courtesy of Thomson / Reuters

America’s Community Bankers’ Index (ABAQ) has a positive but overbought weekly chart with the index up 14.0% year to date. ABAQ is above my monthly pivot at $160.62 with semiannual and annual resistances at $181.00 and $195.07. This strength is not justified by the data I presented yesterday and today.

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Chart Courtesy of Thomson / Reuters

The Regional Banking Index (BKX) has a positive but overbought weekly chart with the index up 21.1% year to date. BKX is above weekly support at $49.56 with monthly resistance at $53.72.

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Chart Courtesy of Thomson / Reuters

Just because the Housing index is 61.8% below its mid-2005 high is no reason to buy. The same can be said for ABAQ and BKX at 46.4% below the December 2006 high and the February 2007 high, respectively.

Disclosure: No positions