Noncurrent Loans Plague Community, Regional Banks

Richard Suttmeier
  MAR 12, 2010 8:45 AM

Strength in these banks is a selling opportunity for those with Sell and Strong Sell ratings.


Editor's Note: This article was written by Richard Suttmeier, chief market strategist at, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.

When you can travel from midtown Manhattan to Santee, South Carolina, in 11 hours the economy is slow. Truck traffic doesn't match the rush to buy truckers in the stock market. Americans aren't on the road as motels seemed to be 50% full at best. Isn’t March the month for those Florida family vacations? Even heavy rain from Santee to Land O’ Lakes, Florida, on Thursday didn't deter just a six hour, 45 minute trek.

From my perspective the US economy will have a difficult time sustaining economic growth with job creation from small businesses on Main Street. State and local government budget cuts are at least cutting employee hours if not shedding jobs all together. More Americans are working less than 20 hours a week, which enables them to get at partial unemployment. This is one statistic that’s tough to track in the weekly initial jobless claims, which remains well above the recessionary 350,000 level. In the monthly employment data workers are considered employed even if they worked only one hour during the survey week.

See also, Unemployment Reminiscent of "Groundhog Day"

President Barack Obama promised that “shovel-ready” jobs would be funded, but where are they? Jobs on Main Street have depended upon construction, and that part of the economy lost 64,000 jobs in February. Small businesses either don’t want to borrow due to economic uncertainties or those that want a loan can’t get one because more than half of the community banks of America have a growing problem with non-current loans with loans outstanding more than 80% disbursed versus loan commitments. Yet Wall Street is willing to speculate that some of the community banks are buys as The America’s Community Bankers’ Index is up 10.6% year-to-date. I bet that as these banks rise in price insiders will be selling, as they did during the ban on shorting in 2008.

The Regional Bankers Index
is up a whopping 19.2% year-to-date, as investors rush to buy those “too big to fail” banks; Bank of America (BAC), which rates a Hold, Citigroup (C), which was upgraded to a Buy before this week’s price spike, JPMorgan (JPM) is an overvalued Buy, and Wells Fargo (WFC) has been a Strong Buy. I worry about these ratings as they're based on typical financial data filings, ignoring the bulging toxic loans that the Congressional Oversight Panel is worried about. These banks have been huge creators of those $213 trillion in notional amount of derivative contacts.

Since “The Great Credit Crunch” began at the end of 2007, there have been many trading opportunities for the community and regional banks, and this one isn't yet overbought. Note that the 38.2% Fibonacci Retracement of the decline from February 2007 comes in at $57.

Source: Thomson / Reuters

Noncurrent Loans Continue to Rise at a Faster Pace Than Reserves for Losses.

Reserves for Losses increased $7.0 billion in the fourth quarter, while Noncurrent Loans increased $24.3 billion. Year-over-year reserves are up 30.8% while noncurrent loans are up 67.5%. This continues to put significant stress on the banking system and extends “The Great Credit Crunch” into 2012/2013.

Click to enlarge

Courtesy of the FDIC

Dow 8,500 Before 11,500 --
The 61.8% Fibonacci Retracement is 11,263.

Source: Thomson / Reuters
No positions in stocks mentioned.