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Community Banks Still Under Stress

Stocks in this article: UCBI FBNC FRAF VCBI SNV

NEW YORK ( TheStreet) -- The FDIC Quarterly Banking Profile for the second quarter of 2012 shows that efforts to unwind toxic assets has shown slow but steady progress over the past 12 quarters. Even so, the exposures to toxic assets remain high by historical standards among the country's community banks and much deleveraging needs to be done to end the "Great Credit Crunch".

On Tuesday, I set the stage in my story, The Banking System's Slow, Stressful Recovery. Then Thursday morning, we posted 'Too Big to Fail' Money Center Banks Still Face Stress analyzing the continued exposures to mortgages on the books of banks, home equity loans, other real estate loans and notional amount of derivatives.

My third installment based on FDIC covers the stresses that community banks still face in 2012: nonfarm, nonresidential real estate loans, construction and development loans, with the sum of these called commercial real estate loans.

Overexposures to C&D and CRE Loans: There are 7,246 FDIC-Insured financial institutions in the banking system, down from 8,534 at the end of 2007, when the "Great Credit Crunch" began. The decline of FDIC-insured financial institutions thus totaled 1,288, down 15.1%, and "only" 454 were closed by the FDIC via their failure procedures. The remaining either dropped their banking licenses or merged with another institution.

  • Four-hundred and two (5.55%) are overexposed to construction and development loans, down from 467 in Q1 2012.
  • Another 1,455 banks (20.00%) are overexposed to overall CRE loans including nonfarm, nonresidential real estate loans up from 1,438 in Q1 2012. This means that 1,857 banks (25.63%) are overexposed to commercial real estate loans.
  • Seven hundred and twelve banks (9.83%) have their CRE loan commitments 100% funded, which make them "Zombie Banks," down from 736 in Q1 2012.
  • Another 2,694 banks (37.18%) have their CRE commitments between 80% and 100% funded when a healthy pipeline is around 60% funded. This implies that some community banks continue to keep loans current when they are not by debiting a loan commitment line and crediting a missed payment. This also means that 3406 banks (47.01%) still feel the stress of the "Great Credit Crunch".
  • Among these statistics, there are 1,132 publicly traded FDIC-insured financial institutions. At ValuEngine we slice and dice the data for the publicly traded banks and come up with our proprietary list of problem banks and we name names.

    The candidates for the ValuEngine List of Problem Banks have overexposures to C&D loans and/or CRE loans. Another element of stress is a bank's real estate loan pipeline, and my measure of stress is a red flag when 80% or more of a real estate loan commitment has actually been lent.

    The statistics have improved for publicly traded community banks but we still have:

  • 88 publicly traded banks that are overexposed to C&D loans
  • 404 that are overexposed to CRE loans only
  • 43 that have their real estate loans 100% funded and another 316 that have their pipelines funded by 80% to 99%
  • Our analysis was designed to help investors pick the winners from the potential losers among the publicly traded community banks.

    FDIC Assets Where Community Banks Have Continued Stress:

    Nonfarm, nonresidential real estate loans are up $90.0 billion or 9.3% since 2007. This category of assets peaked at $1.091 trillion in the fourth quarter of 2009 as the real estate asset bubble continued to inflate. Since then this portion of CRE is down $33 billion.

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