Christopher Menkin's  Instablog

DENVER - Community banks and thrifts in the western part of the United States are growing stronger as housing, commercial real estate, agriculture and other key business sectors in that region continue to improve, officials from the Office of the Comptroller of the Currency (OCC) reported.

Kay Kowitt
Deputy Comptroller
Western District

"The OCC is seeing positive changes in commercial real estate, the number of problem community banks is down and continues to fall compared with last year, and the housing market continues to improve," said Kay Kowitt, the OCC's Western District Deputy Comptroller.

The OCC conducts a quarterly analysis of community banks based on financial data from the Consolidated Reports of Condition and Income, also known as Call Reports. In addition, the OCC gathers information about market conditions and industry health from the 15 locally based Assistant Deputy Comptrollers in the Western District. The analysis identifies current and potential risks facing the district's national banks and federal savings associations and assists these institutions in proactively identifying and managing potential risks.

Significant themes and risks in the current economic environment are:

Approximately 77 percent of district banks are highly rated, 1 and 2 category banks as of the end of the first quarter 2013, up from the low point of 64 percent in the latter half of 2010.

Most financial performance metrics stabilized or improved modestly over the past two years. Earnings have improved, largely because of reduced provisioning expenses, and capital levels are satisfactory overall.

Although asset quality has improved, commercial credit continues to present the highest risk to bank earnings. While credit metrics show improving trends, they are still weak relative to historical performance.

Most banks have ample sources of liquidity and moderate interest rate risk.

The level of deposits in banks remains high. This includes demand deposit accounts and money market savings.

Agricultural banks supervised by OCC's Western District are performing well. Currently, one third of banks have agricultural loan concentrations exceeding 100 percent of capital. Examinations in these banks indicate that underwriting remain sounds. Commodity and farmland prices remain high in many areas. Crop insurance mitigated the effect of recent drought conditions, and farm profits remain healthy. At the same time, there are risks to take into account in the current economic environment. Primary threats to farm profits and land values include rising interest rates, decreasing commodity prices, increasing input costs, continuing drought conditions, and changing government support programs.

"If there is one message the OCC wants to deliver to the agriculture-focused banks, it's to prepare now during good times for potential downturns in the future," said Ms. Kowitt. "By preparing now, the banks will be better positioned to help their customers in times of stress."

The OCC explained further that strategic risk is a concern as community banks need to define and implement strategies that allow them to thrive in the face of lingering credit stress, historically low margins, competitive pressures, and uncertainty about regulatory changes. Additionally, while credit risk is stable to declining, earnings are under increased pressure at community banks because of modest loan demand and lack of risk appropriate higher-yield investment alternatives.

These factors have substantially increased strategic vulnerability as community banks seek to bolster income through new products and services, expansion of business lines and cost reductions, especially in critically important control functions such as audit and compliance.

Western District Fact Sheet:
http://www.leasingnews.org/images/WesterBankfact_62013.pdf

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

by Christopher Menkin

The 12 branches of Mountain National Bank, Sevierville, Tennessee, were closed with First Tennessee Bank, National Association, Memphis, Tennessee, to assume all of the deposits. Founded November, 23, 1998 the bank had 127 full time employees as of March 31, 2013 at their four offices in Sevierville, three offices at Maryville, two at Gatlinburg and two at Pigeon Forge, and one in Seymour. They had opened their seventh office 2005 in Pigeon Forge then one each in Maryville 2008, 2008, and 2009, and third branch in Sevierville in 2008 and their fourth in 2009.

The non-current loans shot up to $11.9 million in 2008, and 2009 it hit the fan: non-current going from $197,000 in 2008 to $11.9 million in 2008, then $40.6 million in 2009 and worse yet a $3.9 million loss in 2009, following right after the opening of these new branches in towns were they already had branches. Not the growth of employees, too.

2006 150
2007 173
2008 175
2009 181
2010 150
2011 140
2012 126

The non-current, losses, charge offs got worse as did the net equity:

(in millions, unless otherwise)

Net Equity
2006 $44.3
2007 $59.9
2008 $63.3
2009 $59.7
2010 $48.4
2011 $10.9
2012 $9.8
03/31 $8.6

Profit
2006 $4.4
2007 $4.6
2008 $3.8
2009 -$3.9
2010 $10.0 ($9.975)
2011 -$38.8
2012 -$1.5
03/31 -$820,000

Non-Current Loans
2006 $470,000
2007 $197,000
2008 $11.9
2009 $40.6
2010 $52.0
2011 $36.4
2012 $30.8
03/31 $33.0

Charge Offs
2006 $25,000 ($25,000 1-4 family, $18,000 individual. -$18,000 nonfarm/nonresidential.)
2007 $533,000 ($250,000 nonfarm/nonrs.,$159,000 constr.dev, $95,000 individual, $44,000 comm./industrial)
2008 $957,000 ( $686,000 constr./devlop, $155,000 commercial, $86,ooo individual,$24,000 1-4 family, $6,000 nonfarm/nonresidential.)
2009 $5.6 ( $3.0 constr./devlop,$367,000 nonfarm/nonres, $327,000 commercial/ind., $262,000 individual, $250,000 multifamily,
2010 $9.6 ($5.0 const./devlop, $1.7 nonfarm/nonres, $230,000 individuals, $212,000 commercial industrial.
2011 $28.3 ($14.4 const./devlop,$3.5 nonfarm/nonres., $1.4 multifamily, $240,000 individuals, $156,000 commercial/industrial)
2012 $5.5 ($2.0 nonfarm/nonres,$2.0 1-4 family, $402,000 constr.devlop, $533,000 commercial/industrial, $278,000 individuals)
03/31 $193,000 ($461,000 1-4 family, $26,000 individuals, -$433,000 const./dev., -$6,000 commercial/industrial).

Construction and Land, 1-4 family multiple residential, Multiple Family Residential, Non-Farm Non-Residential loans.

03/31: Tier 1 risk-based capital ratio:2.62%

History of Mountain National Bank

IPO of stock was in July 1998; sold $12 million in 3 weeks to 1500 investors

Main Office: 300 E. Main Street, Sevierville, TN 37862
Opened November 23, 1998
Gatlinburg Branch: 960 E. Parkway, Gatlinburg, TN 37738
Opened March 22, 1999
Gatlinburg Parkway Branch: 745 Parkway, Gatlinburg, TN 37738
Opened May 17, 1999
Pigeon Forge Branch: 3104 Teaster Lane, Pigeon Forge, TN 37863
Opened November 8, 1999
Seymour Branch: 10641 Chapman Hwy., Seymour, TN 37865
Opened August 15, 2002
Kodak Branch, Sevierville: 2140 Winfield Dunn Parkway, Sevierville, TN
37876
Opened June 19, 2003
Pigeon Forge Branch: 242 Wears Valley Rd., Pigeon Forge, TN 37863
Opened October 31st, 2005
West Maryville Branch: 2403 US Highway 411 South, Maryville, TN 37801
Opened October 5, 2007
Collier Drive Branch, Sevierville: 470 Collier Drive, Sevierville, TN 37862
Opened January 25, 2008
Justice Center Branch, Maryville: 2002 E. Lamar Alexander Parkway, Maryville, TN 37804
Opened April 14, 2008
Maryville Regional Branch, Maryville: 1820 Broadway, Maryville TN 37801
Opened January 26, 2009
Newport Highway Branch, Sevierville: 305 New Riverside Drive, Sevierville, TN 37862
Opened June 8, 2009
www.mountainnationalbank.com/a_history.htm

Let's look at the board of directors, who opened branch offices in the wrong time, and many in the same cities, which is also part of this explanation of why the bank failed:

Michael L. Brown served as President and Chief Operating Officer of Mountain National Bank, and of the parent company, Mountain National Bancshares, Inc. As one of the founding Executive Officers, he has been with the bank since 1998, and his banking career has spanned over 30 years. His daily duties include the oversight of four major areas of the bank: Information Technology, Bank Operations, Human Resources and Real Estate Acquisition/Development. He also is actively involved in corporate governance issues at both the bank and holding company levels.

Gary A. Helton, owner/general manager, volunteer Chevrolet, Sevierville.

Charlie R. Johnson, attorney, consultant for Signature Title Company, former mayor of Sevierville, owner of Oak Haven Resort, cabin rental company.

Sam L. Larg, owner of S.L.L, real estate and promotions

Jeffrey Jay Monson, retired from TRW, "has commercial/residential r3eal estate interests in Green and Sevier Counties.

Linda N. Ogle, president of Riverside Motor Lodge and Tiverside Towers, real estate.

Michael C. Ownby, President of Ownby Insurance Service, "He is also Chief Manager of MSP Enterprises LLC, which invests in various real estateventures and stock investments."

John M. Parker, Sr., participated in many business ventures, "John has also been very involved in real estate development of several residential subdivisions in Sevier County and many surrounding counties contributing to the growth of these areas."

Ruth A. Reams is retired from Reams Drug Store where she assisted her husband in the operation of the family business for many years.

Mountain National Bank Board of Directors
http://www.leasingnews.org/images/MountainNationalBank_62013.pdf

You get the idea, all but one are involved in real estate. Their main interest and livelihood and view is real estate. This has been a typical board of banks that have failed with little other type of business background or banking background or financial background, mostly involved very one sided in what took the bank down. Their business friends, relationships, and drive was in one view as you would put blinders on a horse.

"If you're looking for Tennessee Real Estate in Sevier County which includes Pigeon Forge, Sevierville and Gatlinburg, where there is something for everyone, exciting attractions, spectacular shows, outdoor adventures, fishing, hiking, shopping and a wide variety of restaurants."

Ten Pages of homes and property for sale in "Smoky Mountain"
mntnrealestate.com/dynamic/index.php?action=searchresult

Dolly Parton born January 19,1946 Sevierville

Dollywood Theme Park is located in Pigeon Forge, Tennessee; also the site of the Southern Gospel Museum and Hall of Fame, sponsored by the Southern Gospel Music Association, an independent non-profit corporation.

Pigeon Forge, Tennessee

Single-family new house construction building permits:
1997: 36 buildings, average cost: $108,200
1998: 37 buildings, average cost: $135,000
1999: 64 buildings, average cost: $114,000
2000: 67 buildings, average cost: $105,500
2001: 77 buildings, average cost: $101,900
2002: 115 buildings, average cost: $104,700
2003: 144 buildings, average cost: $86,500
2004: 92 buildings, average cost: $143,500
2005: 139 buildings, average cost: $120,500
2006: 67 buildings, average cost: $158,100
2007: 130 buildings, average cost: $109,300
2008: 38 buildings, average cost: $160,500
2009: 38 buildings, average cost: $131,900
2010: 55 buildings, average cost: $98,900
2011: 39 buildings, average cost: $104,300
www.city-data.com/city/Sevierville-Tennessee.html

Sevierville Vacation Home
4 BR / 5BA / Sleeps 8-12
$195 - 275 a nt (USD)
www.vrbo.com/vacation-rentals/usa/tennes.../sevierville

"As of the census of 2000, there were 11,757 people, 5,002 households, and 3,206 families residing in the city"
en.wikipedia.org/wiki/Sevierville,_Tennessee

"Like other towns situated along the Parkway in Sevier County, Sevierville has reaped the benefits of the burgeoning tourism industry brought on by the development of the Great Smoky Mountains National Park. As of 2004, nearly fifty percent of businesses based in Sevierville were linked to tourism. For example, there are over 2,000 hotel and motel rooms in the city today, generating more than $500,000(USD) in hotel-motel tax revenues each year."
www.answers.com/topic/sevierville-tennessee

Court Avenue, developed in 1901 as part of
Sevierville's new commercial district
(Same source as above)

Why visit Sevierville:
visitsevierville.com/vsvideos.aspx

Cabin rentals:
www.vrbo.com/vacation-rentals/usa/tennes.../sevierville

As of March 31, 2013, Mountain National Bank had approximately $437.3 million in total assets and $373.4 million in total deposits. In addition to assuming all of the deposits of the failed bank, First Tennessee Bank, National Association agreed to purchase essentially all of the failed bank's assets.

The FDIC estimates that cost to the Deposit Insurance Fund will be $33.5 million. Compared to other alternatives, First Tennessee Bank, National Association's acquisition was the least costly resolution for the FDIC's DIF.
http://www.fdic.gov/news/news/press/2013/pr13050.html

1st Commerce Bank, North Las Vegas, Nevada, was closed with the FDIC becoming the receiver. To protect depositors, the FDIC entered into a purchase and assumption agreement with Plaza Bank, Irvine, California, to assume all of the deposits of 1st Commerce Bank. Deposits will continue to be insured by the FDIC.

Founded October 18, 2006 the bank had five full time employees. In year-end 2008 there were 15 full time employees. It never made a year-end net profit from the very beginning and in 2010 had a negative equity of $175,000.

1st commerce Bank was part of Capitol Bancorp, Lansing, Michigan, reportedly at one time owned 60 banks, many in trouble, and according to Las Vegas Review-Journal, was seeking to sell its two banks in Nevada: Bank of Las Vegas and 1st Commerce Bank in Nevada.
www.reviewjournal.com/business/banking/b...-banks

In 2009, Capital Bancorp owned four community banks in Nevada, agreeing to sell 1st commerce for $8.25 million, but it did not go through. July 13, 2010 the FDIC said 1st Commerce "...must increase its capital, hire a consultant on top managers and change lending practices under an amended regulatory order." http://www.leasingnews.org/images/AmendedConsentOrder_62013.pdf

In October, 2010 attorney Jason Awad announced he was going to be buying 1st Commerce from Capital Bancorp. www.reviewjournal.com/business/attorney-...-vegas

The end of 2012 Capital Bancorp was still trying to merge or sell off 1st Commercial Bank. At the time, Capital Bancorp owned 12 banks in nine states. The president and CEO of Bank of Las Vegas told the Las Vegas Review-Journal 1st Commercial Bank "...too small to be profitable."

"'It's not doing a lot, (except) servicing what it has," he said. "It was the fifth bank we chartered here. Our long-term plan is to merge it with Bank of Las Vegas.

"'Our long-term plan is to merge it with Bank of Las Vegas.'

"Atkinson said Capital Bancorp has inquired whether regulators would approve the merger but held off moving forward. He said now was the time to reconsider seeking approval to merge.

"It wouldn't be the first time Capital Bancorp has merged local banks. In January 2010, the recession forced Capital Bancorp to merge Desert Community Bank, Red Rock Community Bank and Black Mountain Community Bank into Bank of Las Vegas.

"Capital Bancorp opened 1st Commerce Bank in October 2006. Atkinson said the bank was affected by the recession and banking crisis, never allowing it to expand."
www.reviewjournal.com/business/banking/b...-

A view of the equity, year-end losses since opening, as well as non-current loans show why the bank was never merged or any purchase finalized.

(in millions, unless otherwise)

Net Equity
2006 $7.5
2007 $7.0
2008 $5.8
2009 $2.8
2010 -$175,000
2011 $730,000
2012 $454,000
03/31 $528,000

Profit
2006 -$432,000
2007 -$578,000
2008 -$1.1
2009 -$3.0
2010 -$4.5
2011 -$2.6
2012 -$595,000
03/31 $74,000

Non-Current Loans
2006 0
2007 0
2008 $1.0
2009 $7.5
2010 $5.3
2011 $4.0
2012 $1.3
03/31 $1.3

Charge Offs
2006 0
2007 0
2008 $679,000 ($679,000 commercial/industrial)
2009 $233,000 ($147,000 1-4 family, $77,000 nonfarm/nonres, $9,000 individuals.)
2010 $3.8 ($1.9 nonfarm/nonres,$1.2 commercial/ind., $630,000 construction/development,$32,000 individuals)
2011 $632,000 ($425,000, $301,000, -94,000 commercial/industrial)
2012 $472,000 ($609,000 nonfarm/nonres., -$142,000 commercial/industrial.)
03/31 -$15,000 (-$14,000 commercial/industrial, -$1,000 nonfarm/nonres.)

Construction and Land, 1-4 family multiple residential, Multiple Family Residential, Non-Farm Non-Residential loans.

March 31, 2013: Tier 1 risk-based capital ratio: 3.46%

As of March 31, 2013, 1st Commerce Bank had approximately $20.2 million in total assets and $19.6 million in total deposits. In addition to assuming all of the deposits of the failed bank, Plaza Bank agreed to purchase essentially all of the failed bank's assets.

The FDIC and Plaza Bank entered into a loss-share transaction on $12.2 million of 1st Commerce Bank's assets. Plaza Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector.

The FDIC estimates that cost to the Deposit Insurance Fund will be $9.4 million.
www.fdic.gov/news/news/press/2013/pr13049.html

List of Bank Failures:
http://www.fdic.gov/bank/individual/failed/banklist.html

Bank Beat:
http://www.leasingnews.org/Conscious-Top%20Stories/Bank_Beat.htm

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

By Nathan Stovall and Robert Clark
SNL Financial

The number of undercapitalized banks fell to the lowest level in 17 quarters at the end of the first quarter, with more banks escaping undercapitalized territory through positive means.

The FDIC defines undercapitalized banks as those with a total risk-based capital ratio below 8.0%, a Tier 1 risk-based capital ratio below 4.0% or a Tier 1 leverage capital ratio below 4.0%, unless the bank is a CAMELS one-rated institution. In that case, a bank would be undercapitalized if its leverage ratio is less than 3.0%.

(click to enlarge)

Thirty-eight banks and thrifts were undercapitalized, based on the criteria of having Tier 1 ratios below 4%, at March 31, compared to 42 institutions at the end of the fourth quarter and 61 institutions a year ago, according to SNL data, representing linked-quarter and year-over-year decreases of 9.5% and 37.7%, respectively. The number of undercapitalized institutions has fallen to the lowest level since the fourth quarter of 2008, when 30 banks were considered undercapitalized.

The number of undercapitalized banks in the industry has steadily declined for the last 10 quarters, with failures - rather than banks finding their way out of trouble through other means - accounting for the bulk of the decline. The trend was consistent through 2012, when the number of undercapitalized banks decreased by 26 to 44 institutions. During that period, a number of banks joined the ranks of the undercapitalized and 51 banks failed, while just 15 banks found their way out of trouble through recapitalizations, mergers or balance sheet shrinkage and de-risking, coupled with modest earnings in some cases.

The trend was more positive in the first quarter of 2013, though, when eight banks found their way out of undercapitalized territory without failing.

The number of undercapitalized institutions has declined at a faster rate than the decrease seen in the number of banks on the FDIC's "problem list" over the past few years. However, the number of institutions on the problem bank list has declined more quickly in the last two quarters.

The number of institutions on the problem list fell to 612 at the end of the first quarter, compared to 651 institutions in the fourth quarter and 772 a year ago, a 6.0% drop from the linked quarter and down 20.7% from a year ago. The number of problem institutions stood at 888 two years ago but totaled 702 at the end of 2009 and just 252 at end of 2008.

Most problem and undercapitalized institutions continue to be in areas that suffered from stress during the cycle. Florida, where 68 banks have failed this cycle, had five operating banks falling below the 4% Tier 1 risk-based capital threshold at March 31. Tennessee also had five operating, undercapitalized institutions as of March 31. Tennessee has not seen nearly as many bank failures as Florida, with just three banks failing in Tennessee this credit cycle.

Nevada and Georgia, which together have produced 99 bank failures this cycle, each had three operating undercapitalized institutions at the end of the first quarter.

The overall pace of resolutions has slowed dramatically in the last two years. Ninety-two banks failed in 2011 after 157 saw their doors closed in 2010. The pace of failures slowed considerably in 2012, with 51 banks failing last year.

(click to enlarge)

One institution that has remained on the verge of failing has distorted the amount of undercapitalized institutions in the banking industry for some time. Capitol Bancorp Ltd. has struggled for a while and had eight of its banking subsidiaries among the list of undercapitalized banks for more than two years. In the first quarter though, five Capitol Bancorp subsidiaries previously deemed undercapitalized found their way out of those ranks, but three of those institutions failed.

In total, 10 banks previously deemed undercapitalized have failed since SNL last published the list of undercapitalized banks in the industry. When excluding the banks that have failed or sold since the end of the first quarter, SNL data shows that 27 banks were undercapitalized based on March 31 data, compared to 38 banks at the last publication of the list of undercapitalized banks.

Three Capitol Bancorp subsidiaries remain in undercapitalized territory. Capitol Bancorp said in a Chapter 11 liquidation plan proposed May 16 that it would seek to sell its interests in some or all of its remaining subsidiary banks. Excluding the Capitol subsidiary banks deemed undercapitalized, the number of operating undercapitalized institutions stood at 24 at May 30.

Seven banks, including two banks with more than $1 billion in assets, joined the ranks of the undercapitalized during the first quarter. Some of these banks had Tier 1 ratios below 4% at the end of the fourth quarter, but their financials were not current at the time of the SNL's last publication of undercapitalized banks. Edinburg, Texas-based First National Bank is among those joining the ranks and is the largest with $3.19 billion in assets. First Security Group Inc. unit FSGBank NA, which has $1.04 billion in assets, was also deemed undercapitalized at the end of the first quarter. However, First Security recently recapitalized and down streamed $65 million in capital to FSBBank, boosting the capital ratios of the bank significantly.

Eighteen banks in all escaped undercapitalized territory during the first quarter, which represents a far greater number than in past periods, but again failures were responsible for the bulk of the decline. Raising much-needed capital has proved very difficult for struggling institutions seeking new funds for defensive purposes, but a handful of banks have enjoyed greater success raising funds this year.

For instance, a few banks previously deemed undercapitalized escaped that territory by raising capital. New Dominion Bank raised in excess of $10 million after spending close to a year on the transaction. And Patterson Bankshares Inc.'s Patterson Bank recapitalized through an unorthodox capital raise where investors injected capital directly into the bank subsidiary.

A few other banks managed to build their capital levels modestly while delivering their balance sheets. And one bank, First National Bank of Baldwin County, found a lifeline selling to First Bancshares Inc. through Section 363 of the U.S. Bankruptcy Code. Under the structure of 363 sales, a bank holding company files for Chapter 11 bankruptcy protection while another entity recapitalizes and purchases the bank subsidiary. The buyer in turn avoids acquiring liability and adverse claims associated with the holding company.

Those transactions have increased in the last year but still are not commonplace. Failures, meanwhile, have slowed considerably and troubled banks seem to have more time to work through issues before facing a closure by their regulators. Just 14 banks have failed this year, and only 41 banks have closed in the last 12 months.

(click to enlarge)