Community Banks Still Under Stress

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.

    Construction and development loans are down $411.5 billion since the end of 2007, or 65.4%. Back between the 1988 and 1992 crisis, C&D Loans declined 54.7%, and thus the "Great Credit Crunch" has exceeded that percentage. This is the loan category where community banks remain reluctant to lend and it remains a drag on the homebuilders, who want to rebuild inventories.

    As the graph below from the FDIC shows, the noncurrent rate on C&D loans peaked in early 2009, but remains significantly elevated. This indicates that continued write-offs are necessary and implies that the FDIC will continue the bank failure process to whittle down their List of Problem Banks from the current total of 732 FDIC-insured financial institutions.


    Courtesy FDIC

    The above table shows data from the FDIC and www.ValuEngine.com covering 29 community banks that have overexposures to real estate loans. This is just a sampling.

    Click here for a larger version of the bank chart.

    Reading the Table:

    FDIC Assets: The assets shown in FDIC data. Synovus ( SNV) is the largest in the table with $26.04 billion in assets.

    C&D Loans: The dollar amount of the exposure. SNV has the largest size exposure at $2.7 billion.

    Cons/RBC: The percent exposure vs. risk-based capital. Banc Trust Financial has the highest risk at 154% of risk-based capital vs. the 100.0% regulatory guidelines.

    CRE/RBC: The percent exposure vs. risk-based capital. Pacific Premier Banc has the highest risk at 585% of risk-based capital vs. the 400.0% regulatory guidelines.

    Pipeline: The percentage of CRE loans outstanding versus loan commitments. At 100% all commitments are fully funded which is a negative sign as a healthy pipeline is around 60%. Franklin Financial ( FRAF) and Virginia Commerce ( VCBI) have their CRE loan commitments fully funded.

    OV/UN Valued: The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

    VE Rating: A "1-Engine rating" is a Strong Sell, a "2-Engine rating" is a Sell, a "3-Engine rating" is a Hold, a "4-Engine rating" is a Buy and a "5-Engine rating" is a Strong Buy.

    Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

    Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number are projected to move higher by that percentage over the next 12 months.

    Analysis of the ValuEngine Data

    Looking at the overvalued/undervalued data, United Community Banks ( UCBI) is the most undervalued by 75% followed by Synovus at 69% undervalued. First Bancorp ( FBNC) is overvalued by 300%.

    There are three stocks rated Strong Sell, one rated Sell, six rated Hold, 16 rated Buy and three rated Strong Buy. Stocks with a 1- or 2-Engine rating should be avoided. Those with a 4- or 5-Engine rating could survive the stresses and can be considered a potential but speculative take-over candidates.

    This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

    Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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