Bank Failures will haunt Housing and Banking

8/9/2019 Bank Failures will haunt Housing and Banking

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Richard Suttmeier is the Chief Market Strategist at www.ValuEngine.com.ValuEngine is a fundamentally-based quant research firm in Princeton, NJ. ValuEngine

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Marc h 30, 2010 Bank Fai lures w i l l haunt Housing and Bank ing

Bank Failure Friday closed four more private banks. The FDIC Deposit Insurance Fund hauntsbanking. The NAHB worries about tougher regulatory guidelines on CRE lending. Restating theignored regulatory guidelines yet again! I look at the daily charts for Housing, and Communityand Regional Banks.

Bank Failure Friday Four more private community banks failed last Friday, bringing the total for thefirst quarter of 2010 to 41. At this pace the FDIC will close 164 banks this year, well within my predicted150 to 200 failures in 2010. This brings the total since the end of 2007 to 206, on the way to 500 to 800by the end of 2012 and into 2013. All four failures were extremely overexposed to C&D and CRE loanswith loan pipelines between 88.7% and 100%. Key West Bank in Florida had exposures higher than Ihave ever seen; 4015% for C&D when the guideline is 100% and 20,216% for CRE when 300% is theguideline.

The Deposit Insurance Fund (DIF) has now been tapped for $6.5 billion in 2010, bringing the DIFdeficit to $27.4 billion excluding the prepaid $46 billion that sits on the sideline for 2010 through 2012.Another prediction still stands is that the FDIC will tap its $500 billion temporary line of credit with theUS Treasury this year. At this pace of DIF Drain, the FDIC will need $26 billion to cover closures in2010. This would make the DIF $18.6 billion short if you used up all prepaid fees. The FDIC wants toallocate just 1/3 of the $46 billion in 2010, thats just $15.3 billion, which puts FDIC already in the holeby $12 billion, which justifies tapping the Treasury now.

Total Cost to DIFQ1,2010 $6,510.2

DIF 2009 Q4 ($20,850)

Cumulative Loss ($27,360)

2010 Fees $15,333Estimated DIF ($12,027)

2011 Fees $15,333

2012 Fees $15,333

2010 - 2012 Fees $46,000

Estimated DIF $18,639.8

The NAHB is worried about tighter CRE standards. With the Comptroller of the Currency JohnDugan recently stating that new tougher lending standards for CRE lending are on the way, theNational Association of Home Builders is worried that tighter lending conditions would further hurt themarket for new homes. Some builders are reporting that current C&D loans that are current are beingcalled in by community banks.


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With so many community and regional banks overexposed to the current guidelines that have beenignored by the Comptroller of the Currency, I will reserve judgment until the guidelines are made public.

These guidelines are extremely important and I review them frequently.

Back in the fall of 2005, the Federal Reserve, US Treasury and the Federal Deposit InsuranceCorporation (FDIC) realized that community banks were loaning funds to the housing and real estatemarkets at a pace above what these regulators thought as prudent. Guidelines were set and monitoredvia quarterly filings to the FDIC. These guidelines were formalized by the end of 2006. They includedthe following stipulations:

Overexposure to construction and development loans: The first guideline states that if loans forconstruction, land development, and other land are 100% or more of total risk capital, the institution isconsidered to have loans concentrations above prudent risk levels, and should have heightened risk

management practices.Overexposure to construction and development loans including loans secured by multifamilyand commercial properties: If loans for construction, land development, and other land, and loanssecured by multifamily and commercial property are 300% or more of total risk capital, the institutionwould also be considered to have a CRE concentrations above prudent levels, and should employheightened risk management practices.

There are 380 publicly traded banks overexposed the C&D loans, and another 372 overexposed toCRE loans only. Thats 752 publicly traded banks that are candidates for the ValuEngine List ofProblem Banks.

Looking at all 8,012 FDIC-Insured Financial Institutions we find 1,514 overexposed to C&D loans, andanother 1,312 overexposed to CRE loans only. Thats 2,896 banks or 36.1% of the 8,012 at risk offailure.

Looking at loans versus loan commitments, which I call Pipeline even more banks are feeling additionalstress. A normal or healthy pipeline is when 60% of the C&D and CRE loans are outstanding versusa banks total commitment to these types of loans. Of the 8,012 FDIC-Insured Financial Institutions only594 or just 7.4% have a pipeline between 55% and 65%. Most bank failures have a pipeline above80%, which is a sign of collection problems: 4,172 banks or 52% have this stress characteristic. Ofthese, 1,406 have a pipeline thats 100% funded, which is 17.5% of all banks.

Housing Sector Index (HGX) has a neutral daily chart with the index up 10.5% year to date. HGX is

below weekly resistance at $115.89 in front of tomorrows Case-Shiller Home Price Index, which Isuspect will begin to show difficulty in continuing the slight improvement in prices, since mid-2009. The21-day simple moving average is support at 110.35.


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Chart Courtesy of Thomson / Reuters

Americas Community Bankers Index (ABAQ) has a neutral daily chart with the index up 12.2%year to date. ABAQ is above my monthly pivot at $160.62 with a pivot this week at $165.33, andsemiannual and annual resistances at $181.00 and $195.07.



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The Regional Banking Index (BKX) has a neutral daily chart with the index up 22.1% year to date.BKX is above weekly support at $50.88 with monthly resistance at $53.72.


Thats todays Four in Four. Have a great day.

Richard SuttmeierChief Market Strategistwww.ValuEngine.com(800) 381-5576

As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. Ihave daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters aswell as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as theValuTrader Model Portfolio newsletter. I hope that you will go to www.ValuEngine.com and review some of the sampleissues of my research.

I Hold No Positions in the Stocks I Cover.

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Bank Failures will haunt Housing and Banking