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March 30, 2010 – Bank Failures will haunt Housing and Banking

Bank Failure Friday closed four more private banks. The FDIC Deposit Insurance Fund haunts
banking. The NAHB worries about tougher regulatory guidelines on CRE lending. Restating the
ignored regulatory guidelines yet again! I look at the daily charts for Housing, and Community
and Regional Banks.
Bank Failure Friday – Four more private community banks failed last Friday, bringing the total for the
first quarter of 2010 to 41. At this pace the FDIC will close 164 banks this year, well within my predicted
150 to 200 failures in 2010. This brings the total since the end of 2007 to 206, on the way to 500 to 800
by the end of 2012 and into 2013. All four failures were extremely overexposed to C&D and CRE loans
with loan pipelines between 88.7% and 100%. Key West Bank in Florida had exposures higher than I
have ever seen; 4015% for C&D when the guideline is 100% and 20,216% for CRE when 300% is the
guideline.
The Deposit Insurance Fund (DIF) has now been tapped for $6.5 billion in 2010, bringing the DIF
deficit 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 the
US Treasury this year. At this pace of DIF Drain, the FDIC will need $26 billion to cover closures in
2010. This would make the DIF $18.6 billion short if you used up all prepaid fees. The FDIC wants to
allocate just 1/3 of the $46 billion in 2010, that’s just $15.3 billion, which puts FDIC already in the hole
by $12 billion, which justifies tapping the Treasury now.
Total Cost to DIF
Q1,2010 $6,510.2
DIF 2009 Q4 ($20,850)
Cumulative Loss ($27,360)
2010 Fees $15,333
Estimated 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 John
Dugan recently stating that new tougher lending standards for CRE lending are on the way, the
National Association of Home Builders is worried that tighter lending conditions would further hurt the
market for new homes. Some builders are reporting that current C&D loans that are current are being
called in by community banks.
With so many community and regional banks overexposed to the current guidelines that have been
ignored 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 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. They included
the following stipulations:
Overexposure to construction and development loans: The first guideline 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.
Overexposure to construction and development loans including loans secured by multifamily
and commercial properties: If loans for construction, land development, and other land, and loans
secured by multifamily and commercial property are 300% or more of total risk capital, the institution
would also be considered to have a CRE concentrations above prudent levels, and should employ
heightened risk management practices.
There are 380 publicly traded banks overexposed the C&D loans, and another 372 overexposed to
CRE loans only. That’s 752 publicly traded banks that are candidates for the ValuEngine List of
Problem Banks.
Looking at all 8,012 FDIC-Insured Financial Institutions we find 1,514 overexposed to C&D loans, and
another 1,312 overexposed to CRE loans only. That’s 2,896 banks or 36.1% of the 8,012 at risk of
failure.
Looking at loans versus loan commitments, which I call Pipeline even more banks are feeling additional
stress. A “normal” or “healthy” pipeline is when 60% of the C&D and CRE loans are outstanding versus
a bank’s total commitment to these types of loans. Of the 8,012 FDIC-Insured Financial Institutions only
594 or just 7.4% have a pipeline between 55% and 65%. Most bank failures have a pipeline above
80%, which is a sign of collection problems: 4,172 banks or 52% have this stress characteristic. Of
these, 1,406 have a pipeline that’s 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 tomorrow’s Case-Shiller Home Price Index, which I
suspect will begin to show difficulty in continuing the slight improvement in prices, since mid-2009. The
21-day simple moving average is support at 110.35.
 Chart Courtesy of Thomson / Reuters

America’s 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, and
semiannual and annual resistances at $181.00 and $195.07.

Chart Courtesy of Thomson / Reuters

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.

Chart Courtesy of Thomson / Reuters

That’s today’s Four in Four. Have a great day.

Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com
(800) 381-5576
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I
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