Investing in community and regional banks has become difficult, given share-price declines since my Dec. 2 post, "Here's Why It's Time To Take Profits on These 7 Regional Banks". This report was based upon data from the Federal Deposit Insurance Corporation Quarterly Banking Profile for the third quarter. Today, the focus is on FDIC data from the QBP for the fourth quarter.
It's difficult to be positive on an industry that continues to lose members and sheds jobs, and the latest data shows that the banking system is still not in growth mode. The number of FDIC-insured financial institutions fell by another 88 banks sequentially to 6,182, down 27.5% since the end of 2007. Since then, the number of employees in the banking system is down 8.2% and has been declining in every quarter since 2007.
Here's a scorecard for five regional banks, four of which were profiled on Dec. 2.
Here's a scorecard for 14 community banks last covered on Jan. 13.
BNC Bancorp (BNCN) is in bear market territory and remains overexposed to commercial real estate loans.
Cardinal Financial (CFNL) is in bear market territory, but is no longer overexposed to construction and development loans but remains overexposed to CRE loans.
Hancock Holding (HBHC) is in bear market territory but remains without overexposes to C&D or CRE loans.
Bank of the Ozarks (OZRK) is in bear market territory and remains overexposed to C&D and CRE loans.
Here's a portion of the FDIC QBP.
Total Assets continues to rise and is now up 22.5% since the end of 2007, despite a decline in the percentage controlled by the "too big to fail" money center banks to 41.7%, down from 42.3% of the total assets in the banking system.
Residential Mortgages (one to four family structures) represent the mortgage loans on the books of our nation's banks. Banks continue to slowly increase mortgage issuance but production is down 15.2% since the end of 2007, as regional banks remain reluctant to lend.
Nonfarm / Nonresidential Real Estate Loans represent lending to construction companies and homebuilders to build office buildings, strip malls, apartment buildings and condos, which has been a major focus for community banks. This category of real estate lending continues hold up well and is up 27.1% since the end of 2007.
Construction & Development Loans represent loans to community developers and homebuilders to finance planned communities. This was the Achilles heel for community banks and the major reason that more than 500 banks were seized by the FDIC since the end of 2007. The recovery in this real estate loan category has been solid in recent quarters. C&D loans were up 3.3% in the fourth quarter but are down 56.3% since the end of 2007.
Home Equity Loans represents second lien loans to homeowners who borrow against the equity of their homes. Many of these loans failed as homeowners became underwater on their original mortgages. According to the S&P/Case-Shiller Home Price Indices, the price of an average single-family home is up 36% since the March 2012 low, yet home equity loans continue to slide. Regional banks typically offer HELOCs, but these loans declined 1.4% in the fourth quarter and are down 23.4% since the end of 2007, a clear sign that banks are reluctant to lend.
Total Real Estate Loans sums it all up. The total of these loans increased by 1.3% in the fourth quarter but is down 12.9% since the end of 2007, which is clearly a sign that the banking system is still reluctant to increase real estate lending.
Other Real Estate Owned declined 8.8% in the fourth quarter as banks continue to sell foreclosed homes and properties on the books of the banks. The banks are taking advantage of the increased prices of homes. Even so, OREO remains 21.1% above the level at the end of 2007, and peaked at $53.2 billion in the third quarter of 2010, which was a peak for foreclosure activities.
Notional Amount of Derivatives has been a financial stress among the seven largest banks. The overall exposure declined 6.5% in the fourth quarter but is still 9.6% above the level at the end of 2007. Investors should be aware that there is no way to know whether or not there are any time bombs ticking among $182 trillion in derivatives.
Deposit Insurance Fund are the dollars available to protect insured deposits. These monies are funded by all FDIC-insured institutions via annual assessments, with the largest banks ponying up the largest amounts. The fourth-quarter gain of 3.6% to $72.6 billion has the FDIC well on its way to satisfy the regulatory guidelines, which is to have the fund at 1.35% of insured deposits by Sept. 20, 2020. At the current level of insured deposits, the DIF would have at $88.3 billion, so there is still work to do.
Insured Deposits grew by 1.8% in the third quarter to $6.54 trillion, up 52.4% since the end of 2007. This growth can be attributed to the rise in deposit insurance guarantees to $250,000 from $100,000, which occurred during the height of the credit crisis.
Reserves for Losses have been declining during the healing process of the banking system, but stalled in the fourth quarter. As a sign of continued stress, reserves are still up 16.6% since the end of 2007.
Noncurrent Loans have been declining, but the decline has been decelerating at 1% in the fourth quarter, 3.8% in the third quarter and 5.4% in the second quarter. Noncurrent loans are 25.4% above the level at the end of 2007.
The bottom line as stated by FDIC Chairman Martin J. Gruenberg: "Banks are operating in a challenging environment. Revenue growth continues to be held back by narrow interest margins. Many institutions are reaching for yield, given the competition for borrowers and low interest rates. And there are signs of growing credit risk, particularly among loans related to energy and agriculture."
This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.