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March 12, 2010 – Non-current Loans Plague Community and Regional Banks

I am back in Land O’ Lakes, Florida after a week on the road. I gave luncheon and dinner
presentations in Wilmington, North Carolina on March 4th, celebrated my granddaughter’s
second birthday in New Jersey, and made several media appearances in New York on Monday
and Tuesday. The bottom line is that the housing market and banking system are not out of the
woods, and strength in community and regional banks is a selling opportunity for those with
SELL and STRONG SELL ratings. Market wise, I predict Dow 8,500 before Dow 11,500.
When you can travel from midtown Manhattan to Santee South Carolina in eleven hours the
economy is slow. Truck traffic does not match the rush to buy truckers in the stock market. Americans
are not 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 did not deter just
a six and three quarter hour trek.
From my perspective the US economy will have a difficult time in sustaining economic growth with job
creation from small businesses on Main Street USA. State and local government budget cuts are at
least cutting employee hours if not shedding jobs all together. More Americans are working less than
twenty 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.
President 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, and those that
want a loan can’t get one as 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 (ABAQ) 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 (BKX) is up a whopping 19.2% year to date, as investors rush to buy
those “too big to fail” banks; Bank of America, which rates a HOLD, Citigroup, which was upgraded to a
BUY before this week’s price spike, JP Morgan is an overvalued BUY and Wells Fargo has been a
STRONG BUY. I worry about these ratings as they are based upon 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 opportunity
for the Community and Regional Banks, and this one is not yet overbought. Note that the 38.2%
Fibonacci Retracement of the decline from February 2007 comes in at $57.

Chart Courtesy of 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.

%
Q3 2009 Q4 2009 $ Change Change % YOY

Total assets 13,246,624,000 13,109,456,000 -137,168,000 -1.0% -5.3%

Reserve for Losses 220,499,000 227,480,000 6,981,000 3.2% 30.8%

30-89 Day Past Due 142,617,000 140,430,000 -2,187,000 -1.5% -11.9%
Noncurrent Loans 366,991,000 391,310,000 24,319,000 6.6% 67.5%
Other real estate owned 37,143,000 41,357,000 4,214,000 11.3% 55.1%
Courtesy of the FDIC
Dow 8,500 Before 11,500 – The 61.8% Fibonacci Retracement is 11,263.

Chart Courtesy of Thomson / Reuters

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

Check out the latest Main Street versus Wall Street on Forex TV Live each day at
1:30 PM. The next broadcast is Monday, March 8, 2010.
http://www.forextv.com/Forex/custom/LiveVideo/Player.jsp
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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