Many More Community Banks Will Fail

NEW YORK (TheStreet) -- Since the beginning of the "Great Credit Crunch" at the end of 2007 there have been 442 bank failures: the Federal Deposit Insurance Corporation closed 25 banks in 2008, then 140 in 2009, then an annual peak of 157 in 2010.

Bank failures tapered off to 92 in 2011, and so far in 2012 the pace of failures has slowed to just 28 year to date. My standing prediction has been that 500 to 800 banks face failure before the banking crisis is over.

What's important to investors is to avoid the publicly traded community banks that have the risk-characteristics of those that have been closed due to failure.

Since the end of 2007 the number of FDIC-insured financial institutions declined by 1,227, or 14.4% to 7,307 from 8,534. Most of this decline comes from mergers, some of which are assisted by the FDIC, others on the desire by sellers to avoid failure. The remaining closed banks are FDIC-forced failures.

Exposures to Construction and Development and Commercial Real Estate lending have been declining in recent quarters, but there are still 1,904 institutions overexposed to C&D or CRE loans. This represents 26.1% of all FDIC-insured financial institutions. There are 1,144 publicly traded community and regional banks and 489 or 42.7% of those have overexposures to C&D and / or CRE loans. The publicly traded overexposed banks are the ones investors should know about.

At ValuEngine we publish a List of Problem Banks by name, whereas the FDIC does not publish its List of Problem Banks. To subscribe, go to www.ValuEngine.com and click on the Newsletters tab. This report is called, "ValuEngine FDIC Evaluation Report".

Another sign of stress in the banking system is the status of banks' real estate loan pipelines. Pipeline is the percentage of real estate loans outstanding vs. loan commitments, where a healthy bank pipeline is around 60% funded. A pipeline that's 100% funded indicates that all loan commitments have been fully funded, and the bank is not getting the monthly payments they expect in terms of interest and principal payments.

There are 736 institutions that have their real estate loan commitments fully funded, which makes it extremely difficult for these institutions to extend new real estate loans. I believe that if a bank has a pipeline that's 80% or more funded, they are reluctant to extend additional real estate loans. This is the status for 2905 community banks or 39.8% of all FDIC-insured financial institutions.