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Back in the fall of 2005, the Federal Reserve, U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC) realized that community banks were loaning funds to the housing and real estate markets at a pace above what these regulators thought was prudent. Guidelines were set and monitored via quarterly filings to the FDIC. These guidelines were formalized by the end of 2006. They included the following stipulations:

  • Overexposure to construction and development loans: The first guideline states that if loans for construction, land development, and other land are 100% or more of total risk capital, the institution is considered to have loan concentrations above prudent risk levels, and should have heightened risk management practices.

  • Overexposure to construction and development loans, including loans secured by multifamily and commercial properties: If loans for construction, land development, and other land, and loans secured by multifamily and commercial property are 300% or more of total risk capital, the institution would also be considered to have a CRE concentrations above prudent levels and should employ heightened risk management practices.

These guidelines have been and continue to be ignored by the FDIC!

Bank Failure Friday

The FDIC closed four more banks last Friday, three of which were publicly traded and on the ValuEngine List of Problem banks.

  • 25 banks failed in 2008

  • 140 banks failed in 2009 with a peak of 50 in the third quarter

  • 157 banks failed in 2010

  • 22 banks have failed year to date in 2011

  • 344 banks have failed since the end of 2007

I still predict 500 to 800 bank failures in total by the end of 2012 into 2013.

The publicly traded banks were Habersham Bank (HABC), Clarkesville, Georgia, Charter Oakes Bank (CHOB), and San Luis Trust Bank (SNLS), San Luis California. These banks are on the ValuEngine List of Problem Banks with overexposures to both C&D and CRE loans. The C&D ratios to risk-based capital were 639.3%, 239.5% and 245.8% respectively, versus the 100% maximum guideline. The figures were 1239.7%, 814.8% and 587.6% respectively for CRE loans, versus the 300% maximum guideline. The banks’ real estate loan pipelines were 98.4%, 96.5% and 100% respectively, where 60% is a healthy pipeline.

The FDIC continues to be slow in closing banks that no longer deserve to service Main Street USA.

The FDIC is ignoring the guidelines for exposures to C&D and CRE loans in choosing banks to take over the assets of failed banks. Banks are getting a back-door bailout with favorable loss-sharing arrangements with the FDIC.

Three of the banks that acquired the assets of Friday’s failed banks were also in violation of the regulatory guidelines for exposures of risk-based capital to construction and development loans and to Commercial real estate loans. SCBT National Association (SCBT) has risk ratios of 145% for C&D loans and 423.7% for CRE loans that are 89.3% funded. Bank of Marin (BMRC) has a risk ratio of 67.4% for C&D loans, which is fine, but has a 485.2% exposure for CRE loans with a loan pipeline that’s 78.7% funded.

First California Bank (FCAL) has a risk ratio of 41.5% for C&D loans, which is fine, but it also has a 358.2% exposure to CRE loans with a loan pipeline of 86.9%. ValuEngine rates each of these banks a HOLD. The FDIC policy of rewarding banks with overexposures to real estate loans is deciding which banks fail and which banks survive. This is wrong.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 3 Banks Saving Failed Banks Are Also in Violation of Regulations