NEW YORK ( TheStreet) -- The number of FDIC-insured financial institutions continues to decline and at the end of the third quarter the total is down to 7,181 from 7,245 sequentially. Among the total are 1,131 publicly-traded money center banks, regional banks and community banks including savings and loan associations.Today I focus on 24 regional and community banks and their exposures to commercial real estate loans, which include construction and development loans. But first, here's a review of the regulatory guidelines for risk exposures for these types of real estate loans. In the fall of 2005, the Federal Reserve, U.S.Treasury and the Federal Deposit Insurance Corporation realized that community banks were loaning funds to the housing and real estate markets at a pace above what these regulators thought as prudent. Guidelines were set and monitored via quarterly filings to the FDIC. These guidelines were formalized by the end of 2006. They included the following stipulations: The guidelines for exposure to construction and development states that if loans for construction, land development, and other land are 100% or more of total risk capital, the institution is considered to have loans concentrations above prudent risk levels, and should have heightened risk management practices. The guidelines for exposure to construction and development loans plus loans secured by multifamily and commercial properties are 300% or more of total risk capital, the institution would be considered to have CRE concentrations above prudent levels, and should employ heightened risk management practices. In my opinion, one of the reasons for the great credit crunch was that the three regulators ignored these regulatory guidelines. Today 1,784 FDIC-insured financial institutions or 24.8% of the banking system remain overexposed to CRE loans. Another measure of risk is the CRE loan pipeline. The industry considers a pipeline where 60% of loan commitments are funded as healthy. When real estate loans are paid down, new loan commitments can be made. Today 2,472 banks (34.4%) have 80% to 100% of their CRE loans fully funded, which is a reason that community banks are reluctant to lend to developers and home builders. This remains a sign that the great credit crunch continues. Banks can't issue new loan commitments until the old ones are paid off.
Reading the TableOV/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 in the table are projected to move higher by that percentage over the next 12 months. 12 month trailing P/E Assets: Add three zeros to get the total number. C&D Loans: Add three zeros for total exposures. Cons/RB: The C&D loan exposure versus risk-based capital. CRE/RB: The CRE loan exposure versus risk-based capital. Pipeline: The percentage of CRE loans outstanding versus loan commitments. Value Level: The price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual. Pivot: A level between a value level and risky level that should be a magnet during the time frame noted. Risky Level: is the price at which to enter a GTC limit order to sell on strength. Observations:
- We have nine buy-rated bank stocks and 15 hold-rated stocks.
- Twelve banks are undervalued by double-digit percentages
- Fourteen banks have had double-digit gains over the past 12 months led by a 67.6% gain in SNV (SNV) . The only bank with a double-digit loss over the past 12 months is VLY (VLY) with a loss of 12.9%.
- All 24 banks are projected to be higher over the next twelve months, but by lower percentage gains of just 1.1% to 13.8%, led by SNV.
- We show that 22 of 24 banks have reasonable 12 month trailing P/E between 10.7 and 18.8. SNV has an elevated P/E at 25.7.
- The only bank overexposed to C&D loans is TCBI (TCBI)with a ratio of 111.7%.
- 23 of 34 banks are overexposed to CRE loans.
- Four banks have pipelines that are more than 80% funded.