Banking on Bailouts: How Many IndyMacs Are Out There?

In what has been billed the third-largest bank failure on record, IndyMac Bank (IMB) has been taken over by federal regulators. According to a weekend Wall St. Journal story, the bank's collapse will cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion. That would exhaust over 10% of the entire deposit insurance fund of the FDIC.

That eye-opening statistic led me to wonder how many more IndyMac banks might be lurking in the wings. We had some alert to the gravity of IndyMac's situation simply by following its stock price, as shares moved from over $10 early in the year to under $2 by May. Perhaps year-to-date stock performance might alert us to other candidates for seizure--and further challenges for the FDIC.

With the help of data from the excellent Barchart site, I tracked the year-to-date performance of every publicly traded bank and savings and loan institution. I particularly focused on two groups of companies: those that have enjoyed a rising stock market performance year-to-date and those that have severely underperformed the market. I measured this latter group in two ways: those that fall into the lowest 20% of year-to-date performers across all NYSE, NASDAQ, and ASE issues and those that fall into the lowest 10%. Mr. Market is alerting us to the possibility of an IndyMac-like demise for this latter group, the majority of which are down more than 60% on the year.

Interestingly, I found 33 banks and savings and loan institutions that are up year-to-date in their stock market performance. They are outperforming the broad stock market, and they are trouncing their sector peers. Many are yielding 3% or more and have enjoyed solid earnings growth. I took it upon myself to look up a few annual reports for these financial institutions. All appear to have conservative lending practices, with no subprime residential loans and no major problem loans to overextended real estate developers.

Many of these high performing banks are located in decidedly unsexy areas where there was no real estate boom. Two of the banks, for example, are located in my former hometowns of Syracuse and Ithaca, NY. More than ten of the banks were located in the Northeast; only one was in the West.

The bank and savings and loan stocks falling into the bottom 20% of all market performers were far more numerous: there were 113 in all. Of these, 45 are severe laggards, falling into the bottom 10% of market performers. Interestingly, about half of these are located in the West and Southeast regions of the country: two of the hotter real estate markets during the boom. And the large regional banks? Seven fall into the underperforming category; two in the lowest group. None are up on the year.

The housing crisis does not appear to be over and yet the market is already warning us of at least 45 banks in straits potentially similar to IndyMac. Many more of the group of 113 may join that list as the housing situation unfolds, particularly among smaller banks. Meanwhile, I notice on the Bankrate site that many of the banks offering the juiciest CD rates are those on my list of stock market basket cases. It's understandable that they want/need to raise capital, but if the banks cannot fund those juicy returns, it will only be a larger call on FDIC funds. That is a demand that the FDIC is ill-prepared to meet, given its historically low reserve ratio, raising the unpleasant prospect of bailing out the regulators.

The Geographic Distribution of Troubled Banks

After reviewing strong and weak bank performers, I decided to look at banks specific to regions of the U.S. and identify the proportion that have shown weak year-to-date performance. My criterion for weakness was that the stocks had to be down at least 50% year-to-date, much weaker than the broad stock market and weaker than the commercial banking stocks as an entire group. Once again, my hat tip of credit to Barchart for the data:

NORTHEAST: 3/72
SOUTHWEST: 2/15
MIDWEST: 14/57
SOUTHEAST: 16/111
WEST: 22/55

TOTAL: 57/310

Overall, about 18% of the bank stocks are displaying pronounced price weakness. The highest concentrations are in the midwest, southeast, and particularly the west. It would not be surprising if lending is most curtailed in these areas, as banks build their capital, making economic recovery more difficult.

It is also not surprising that two-thirds of the troubled banks are in the southeast and west, which had been the hottest real estate markets.

These data don't include the major regional banks, savings and loan banks, and banks that are privately held. I don't have data on the latter, but the first two groups display just as much weakness as the banks summarized above, posing a challenge for regulators and for particular regional economies and municipalities.

Comments

[mark van:]

i guess you did not want to list the insolvent banks or banks that were close to insolvency? good article but really nothing most investors do not already know. a list of your findings would have been helpful.

2008 Jul 13 05:47 PM

[garsonvonah:]

One great benefit for other banks (who are also not doing well that serve the same area as IndyMac) is that Depositor's money drained from InyMac will go to them. As IndyMacs' deposits are in the thirty billion dollars or so range, that will greatly ease the capitalization of those other poor performing banks. JUST MAYBE INDYMACS DEMISE IS A GOOD THING!

2008 Jul 13 06:10 PM

[Ray Lopez:]

Bring back free banking. Get rid of FDIC insurance. It only encourages "hot money" to go to badly run banks. Moral hazard. With my plan, interest rates will go up, and so will savings, is that a bad thing?

2008 Jul 13 07:18 PM

[dixie:]

I disagree with your premise that there must be a correlation between a.) the downward movement of stock price and b.) weak fundamentals and loan policies which lead to bank failures. This is a big leap to make.

Many of the small community and regional banks I follow in the SE and SW have strong fundamentals but their stock prices have been driven down by the massive write-offs experienced, not by them, but by much larger banks with familiar names. "Guilt by association," i.e just having the name,"bank" in their suffix has been sufficient to drive down share value. The sector is skewed. Babies have been tossed out with the bath water.

2008 Jul 13 08:11 PM

[daniel2008:]

Indimac-abberation or omen?

2008 Jul 13 08:45 PM

[daniel2008:]

Slay the message deliverer.

2008 Jul 13 08:46 PM

[Vegasjoe:]

Big banks or little banks,
With excessive leverage, you all go in the tank.
What else can go wrong in this eleventh hour,
Other than denial by all banks of commercial loans now going sour!

2008 Jul 13 08:52 PM

[Ames Tiedeman:]

There will be more failures. IMB is not the last.

2008 Jul 13 10:33 PM

[i-live-2-ride:]

A few weeks ago I read that some global advisors are warning their clients to stay away from the dollar, then I read a financial article that said some of the 6000 American banks are on the threshold of failure within weeks. Now we learn of the Indy fiasco... No offense, but I'm going to bullion with my paltry sum.

June 28th, 2008
"BRUSSELS/AMSTERDAM - Fortis expects a complete collapse of the US financial markets within a few days to weeks. That explains, according to Fortis, the series of interventions of last Thursday to retrieve € 8 billion. “We have been saved just in time. The situation in the US is much worse than we thought”, says Fortis chairman Maurice Lippens. Fortis expects bankruptcies amongst 6000 American banks which have a small coverage currently. But also Citigroup, General Motors, there is starting a complete meltdown in the US”

2008 Jul 14 12:05 AM

[Rabbito:]

DSL will fail I made 50% on the way down, wish I stuck with it all the way down

2008 Jul 14 12:11 AM

[helplessobs...:]

I think dixie has it right that well run banks have been crushed with the rest. Last week I talked with a BB&T loan officer. Her loan volume is down and she expects HELOC and commercial loans will cause an increase in loan loss reserves. Over all this 14th largest bank has been very conservative in its lending. It recently increased its dividend. Thursday will tell as they report earnings. I look for 65 - 75 cents per share.

2008 Jul 14 12:57 AM

[Jase:]

Despite the doomsday talk, IndyMac will come out of this breathing. The FDIC will court a buyer within the next 10 days (they claim they'll do so within 90-days). Their share price will begin climbing back above the $1 mark. The ride up, however, will indeed be a choppy one. They won't backstop Fannie and Freddie and leave IMB to fend for itself, mark my words, IndyMac will breathe again and there is a several hundred percentage upside reward waiting for those with nerves of steel.

2008 Jul 14 03:01 AM