Move Out of Community Banks, FDIC Data Warn

The Federal Deposit Insurance Corporation has good news and bad news for investors in U.S. community banks. Here's the good news, according to the FDIC Quarterly Banking Profile for the first quarter.

  • Net income improved by more than 7% year over year for community banks but declined at the larger FDIC-insured financial institutions.
  • Net Interest Margin at community banks was 53 basis points above the larger banks.
  • The percentate of unprofitable community banks declined to the lowest since 1998.

Here's the bad news: Community banks have been increasing their loan exposures to commercial real estate loans, including construction and development Loans. The number of FDIC-insured community banks overexposed to CRE loans rose to 340 institutions, up 21% from a cycle low of 281 in March 2014.

Are banking regulators once again ignoring regulatory guidelines meant to control overexposures to real estate lending?

Here are the key lines from the FDIC first-quarter report.


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 has increased by 29.2% since the end of 2007 to $1.25 trillion.

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 3.4% in the first quarter but are down 54.8% since the end of 2007. C&D loans now total $284.2 billion up from a bottom of roughly $200 billion, which includes legacy non-current loans.

Back in the fall of 2005, the Federal Reserve, US Treasury and the Federal Deposit Insurance Corporation (FDIC) 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.

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