This level of reserve coverage is way ahead of the annualized pace of net charge-offs, which was 2.23% of average loans for the first three quarters. However, with losses on nonperforming construction loans often "approaching 50%," according to one veteran loss mitigation specialist, it's possible that Community Bank's $46 million in loan-loss reserves won't cover losses from the bank's $171 million in nonperforming construction loans.
Hope for regulatory assistance
Sydney Garmong, a partner with Crowe Horwath LLP, a top-10 public-accounting and consulting firm, said the Emergency Economic Stabilization Act of 2008 (also known as the $700 billion bailout) left open the possibility of the Treasury offering assistance to banks and thrifts with less than $1 billion in assets that slipped to undercapitalized because of losses from Fannie and Freddie preferred stock.
This offers hope to National Bank of Commerce, Berkshire Bank, State of Franklin Savings Bank and other undercapitalized institutions that took significant losses on GSE preferred shares. They also must meet other qualifications such as serving "low- and moderate-income populations and other underserved communities."
Bank and thrift ratings
As we see in the third-quarter numbers, loan quality isn't the only threat to banks and thrifts. Many banks that maintained good loan quality were hurt by investments that were previously considered rock-solid. The pace of failures is accelerating, so it's important to keep an eye on the safety of your bank or savings-and-loan institution. TheStreet.com Ratings provides objective, conservative financial strength ratings for all U.S. banks and thrifts.
While the FDIC has temporarily raised deposit insurance limits, it is still a good idea to check out your institution's rating, and ask some questions if the rating is below a C- (Fair Financial Strength).
