The Banking Sector Isn't Out of the Woods

by: Richard Suttmeier

Today I will give an update on community banks, as five more were shuttered last Friday. We have a new category for some community banks; I will call them “deadbeat banks” - those that received TARP money, but are not making payments to US taxpayers. Big banks still have huge exposures to derivatives.

Over the past two weeks, eleven community banks tapped the TARP, while eight banks failed.

Most failures are small banks overexposed to C&D and CRE loans according to regulatory guidelines established in December 2006, and since ignored by the US Treasury, Federal Reserve and FDIC. This was true for all five banks seized by the FDIC on Friday. The number of failures for the first half of 2009 is 45 and 70 since the end of 2007 when the "Great Credit Crunch" began.

The Deposit Insurance Fund was depleted by another $264.2 million cutting the fund to just $6.4 billion, as the total for the 45 closures is up to $12.5 billion.

Some small community “deadbeat banks” are not making TARP dividend payments.

A Treasury spokesperson said that “a number of banks” that received taxpayer-bailout funding via the TARP are no longer paying dividends to the government. I would like full transparency on this list, because one of my predictions was that many banks that got TARPed would eventually fail anyway.

Pacific Capital Bancorp (NASDAQ:PCBC) received $180.6 million from TARP in November then posted a net loss of $49.7 million, and now they suspended dividend payments on its common and preferred stock. PCBC is on our list of "problem banks" with a STRONG SELL rating and an overexposure to nonfarm nonresidential real estate loans.

Seacoast Banking Corp (NASDAQ:SBCF) receiver of $50 million in TARP bucks, and Midwest Banc Holdings (MBHI) receiver of $84.8 million also halted their TARP-related dividends, citing the banking industry’s turmoil and a desire to fortify their balance sheets. Both are on our list of "problem banks". SBCF rates a STRONG SELL and MBHI in unrated, and both are overexposed to construction & development loans and CRE loans.

Our regulators were lax with regard to setting up standards for giving away taxpayer TARP funds.

The Treasury is taking a cavalier attitude respecting the contractual rights of TARP recipients to make decisions about dividend distributions. I say it’s just another sign of a failing government program to help banks, while ignoring the homeowners and consumers they serve. According to Treasury, banks are not in default until they miss up to six payments. Not so for homeowners and consumers.

As I have been saying consistently, most small banks that received TARP donations should not have because of their overexposures to C&D and CRE loans. The December 2006 regulatory guideline established jointly by the US Treasury, Federal Reserve and FDIC has been totally ignored.

Our banking regulators totally botched the give-away of nearly $700 billion. In addition, it was political influence among members of Congress that allowed regulations to be ignored in giving taxpayer money to weak banks, when the program was to help strong banks replenish lending.

Finally, did you know that the big banks still have huge exposures to derivatives?

The Office of the Comptroller of the Currency reports that the credit exposures of our biggest banks ended the first quarter at $1.42 trillion, up 9% year over year. JPMorgan (NYSE:JPM) leads the list with $462 billion followed by Citigroup (NYSE:C) with $264 billion, Bank of America (NYSE:BAC) with $213 billion and Goldman Sachs (NYSE:GS) with $206 billion.

The Q1 FDIC Quarterly Banking Profile shows that the total size of the notional amount of derivative contracts stands at $203 trillion, up 12% year over year.

Disclosure: I have no positions in the stocks mentioned.