Community Banks Key to Economic Recovery

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 |  Includes: KBE, KRE
by: Richard Suttmeier

All’s not rosy in the Labor Market. Community Banks are Key to Economic Recovery. Local communities and small businesses are the key to job creation. Nearly 10% of FDIC-insured institutions are on the FDIC List of Problem Banks.

All’s not rosy in the Labor Market - Last Friday the Labor Department reported that the number of mass layoffs increased in April even as the economy was recovering. Mass layoffs are job cuts involving at least 50 employees from the same company, and these increased by 228 to 1,856 as employers cut 200,870 jobs on a seasonally adjusted basis.

This data does not jive with the monthly nonfarm payrolls numbers, which will likely show that the economy added 475,000 or more jobs in May. While this sounds promising keep in mind that since December 2007 the economy lost eight million jobs and that the unemployment rate moved up to 9.9% despite adding 290,000 jobs in April. Nonfarm payroll were actually down 1.381 million year over year in April.

Community Banks are Key to Economic Recovery - The FDIC’s hidden list of Problem Bank situation clouds the economic recovery. The economy on Main Street is driven by small businesses, the housing market and local construction. This is the engine of job growth in the private sector. Without job growth on Main Street the economy will double-dip, and consumer spending will suffer, which is 75% of the economy.

Community Banks are failing because of overexposures to C&D and CRE loans made from 2004 through 2006, and these loans are defaulting causing banks to fail, and disrupting the economic recovery. It was weakening housing and banking that led to the Recession and Bear Market for stocks in 2007.

Community banks are thus the key to lending to small businesses on Main Street. During the housing boom many community banks overextended their lending to real estate developers and homebuilders in terms of Construction & Development Loans and Commercial Real Estate Loans. Now we have stalled communities, empty office buildings, and strip malls sparsely rented. As a result these loans are becoming noncurrent and banks with the heaviest exposures are failing on Bank Failure Friday.

Local communities and small businesses are the key to job creation. State and local governments are hurt by defaults in real estate taxes or lower real estate taxes as property values decrease. This results in state and local budget cuts, effecting schools, public libraries, services and health care.

Small businesses that had lines of credit with a bank that fails have to begin again with regard to establishing a business relationship with a new bank.

We will see the housing market slump with the expiration of the home buyer tax credits, and these sizable real estate loan exposures at community banks will keep us with a steady flow of bank failures, which will reach the 500 to 800 range by 2012 into 2013.

Nearly 10% of FDIC-insured institutions are on the FDIC List of Problem Banks - The FDIC list of Problem Banks rose to 775 from 702, but if you factor in the 41 bank failures in the first quarter, the problem list grew by 114 banks. By my calculation this list could be as high as 2719 as 34.3% of all banks are overexposed to C&D and / or CRE loans. Consider that 1320 banks or 16.7% have funded 100% of their loan comment out of 4,101 or 51.7% banks that have funded 80% or more of their loan commitment and you can understand why they can’t lend.

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Community Banks and TARP – Nearly $250 billion of TARP funds have been loaned to nearly 700 community banks and that 74 did not make their February 15th dividend payment to tax payers. In mid-June we will find out how many missed their May 15th dividend payments.

Disclosure: No positions