Wednesday, February 27, 2008

Just how bad is the situation with local banks?

Well bad enough that the FDIC is adding jobs to prepare for the upcoming crisis. The FDIC is bringing back 25 hired veterans to deal with the situation and hiring additional full time & contract staff. Some are describing the upcoming problem as a calamity that will exceed the scope of the S&L crisis during the late 1980s.

‘Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia," said Jaret Seiberg, Washington policy analyst for financial-services firm Stanford Group.’

An earlier HingeFire article touched on the subject of shorting local banks. When agencies are gearing up to deal with a developing crisis; this advice appears to be even more pertinent.

An evaluation shows that the bulk of financial weak banks that are publicly-held are located in California. Despite the large population of the state, the ratio of troubled banks within California still stands out as a warning sign for depositors. Other states with significant housing problems such as Florida, Arizona, Ohio and Nevada appear to have much smaller financial exposure in the banking sector relative to the size of their state populations.

The publicly-traded troubled institutions in California with safety ratings of “D” or below include:
  • Friendly Hills Bank (FHLB.OB)
  • Fresno First Bank (FSNF.OB)
  • Folsom Lake Bank (FOLB.OB)
  • Fremont General Corporation (FMT)
  • Focus Business Bank (FCSB.OB)
  • Discovery Bancorp (DVBC.OB)
  • Desert Commercial Bank (DCBC.OB)
  • Coronado First Bank (CDFB.OB)
  • Cornerstone Commercial Bank (CRSB.OB)
  • Commerce Bank Folsom (CBFM.OB)
  • Bank of Santa Clarita (BSCA.OB)
  • Charter Oak Bank (CHOB.OB)
  • Bank of Napa (BNNP.OB)
  • Atlantic Pacific Bank (APFB.OB)
  • Americas United Bank (AUNB.OB)

Florida and Arizona merely have three or less publicly held local banks each with low financial strength ratings. In Florida, the Marco Community Bank (MCBN.OB) and Old Harbor Bank (OHBK.OB) make the list. Likewise in Arizona, the Gold Canyon Bank (GCYO.OB) is an example of an institution with a low financial strength rating.

California stands as an example of the state with an oversized list of publicly traded local banks which have low financial strength rates. This concentration of questionable institutions in a single state, where a large amount of lending has been provided to real estate developers, likely means that a good number of these banks will face liquidity troubles over the coming year as these commercial loans go sour.

Most of these banks are thinly traded on the OTC and putting on a short position may be difficult to implement without excessive slippage in the transaction. The other difficulty is that the majority of these banks have already dropped significantly in price over the past year, in many cases leaving little possible further profit for short-sellers. The most liquid stock, Fremont General (FMT) has already dropped from over $13 to near $2; this bank holding company is already buried in debt downgrades, regulatory troubles, and non-performing sub-prime loans.

Will all of these banks fail – probably not. However in the current economic and credit crimped environment, the risk is leaning in that direction. In California’s Silicon Valley stock option rich environment, executives like to talk about how they “think outside the box”. Looking at the list of financially weak “at risk” institutions in the state, you have to wonder if the entire banking system within California “thinks outside the box”.

California has already been properly depicted as “ground zero” for the subprime crisis. The state was home to dozens of subprime mortgage lenders that imploded; many which appeared to have lax oversight from the state in their greed-driven business. Should there be any expectation that the banks are in any better shape?

At minimum the list above should serve as a warning to depositors that have money at any of these institutions. As outlined in Bank Safety matters more now than ever, paying attention to the financial rating of the institution where you do your standard banking is more important now than any other time in the past years.