Community & Regional Banks Lead, But Should Not!

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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 11, 2010 – Communit y & Regional Bank s Lead, But Should Not !

Continued problems in the banking system do not justify gains in community and regionalbanks. The number of FDIC Problem Banks will continue to rise, as will bank failures, which willdrain the FDIC Deposit Insurance Fund.

The America’s Community Bankers’ Index (ABAQ) is up 9.8% year to date, but this group of morethan 500 smaller banks will be the source of some of the 150 to 200 banks that will fail in 2010.Predicting the winners and losers is not easy, and the ValuEngine List of Problem Banks can help youhandicap, which to buy, sell or avoid. ABAQ does not deserve to be at a 52-week high. Note theextreme overbought condition on the daily chart.

Chart Courtesy of Thomson / Reuters



The Regional Bankers Index (BKX) is up a whopping 17.2% year to date, which is not justified by thegrowing numbers of toxic assets and notional amounts of derivative contracts on the books of ournations largest banks. The BKX is also at a 52-week high with an extreme overbought condition.

Chart Courtesy of Thomson / Reuters

The Num ber of FDIC-Insured “ Problem ” Banks J um ped

27% to 702 in t he Four t h Quar t er o f 2009

In 2008 there were just 25 bank failures. In 2009 there was another 140. So far in 2010 through March5th there have been 26 bank failures bringing the total to 191 since the end of 2007.

The FDIC Deposit Insurance Fund ended 2009 in arrears by $20.9 billion, the second quarter deficitin a row. The last time the fund was negative was in 1992. With the 26 bank failures so far in 2010, myestimate is that the fund deficit is now $25.6 billion. When you consider the $46 billion in pre-paidinsurance fees for 2010 through 2012 the fund is in the black by $20.5, which in my judgment is notenough to get the FDIC through 2010.

The FDIC did not add the $46 billion directly into the fund and will recognize the prepayments into thefund’s equity balance over the next three years as each year’s assessment is recorded.

The FDIC expects bank closures to increase in 2010, but they re-iterate that all insured depositsare safe. Insured Deposits ended 2009 at $5.4 trillion up 13.5% for the year or $641 billion. The



increase is attributed to the increase to $250,000 per account for the FDIC guarantee. This isscheduled to return to $100,000 at the end of 2013, but I predict that the new ceiling will be madepermanent. At the end of 2007 Insured Deposits were $4.3 trillion, so the increase has been $1.1 trillion

or 25.6% during “The Great Credit Crunch”.

Meanwhile, the Deposit Insurance Fund declined from $52.4 billion at the end of 2007 to minus $20.9billion at the end of 2009, a decline of 140%. Here’s the problem: The DIF fell below its 1.15% ofInsured Deposits in June of 2008 and under current law must be funded back to that ratio by the end ofJune 2013, which seems next to impossible without tapping the $500 billion temporary line of creditwith the US Treasury. At today’s level of deposits the fund would have to be about $62 billion. Assumingthe growth of the past two years the fund may have to be $84 billion.

In my opinion the remaining money in the TARP should be deposited in the DIF to ease the stress inthe banking system.

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.

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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.

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Community & Regional Banks Lead, But Should Not!