Construction and Development Loan Exposure Continues to Plague Community Banks

Among the 1,131 publicly-traded FDIC-insured financial institutions 472 banks (41.7%) have overexposures to C&D and/or CRE loans, and 317 banks (28.0%) have 80% to 100% of their CRE loans fully funded.

To compare the FDIC data of the third quarter to that of the second quarter use this link to my post of Sept. 6, Community Banks Still Under Stress. Also check out my post of Nov. 5, Book Profits on These Community Bank Stocks Now.

At www.ValuEngine.com we show the finance sector 9.1% overvalued with industry valuations that are quite divergent from region to region. Community banks in the Northeast are 19.8% overvalued, in the Midwest they are 7.7% undervalued, in the Southeast they are 13.4% overvalued, in the west they are 3.1% undervalued, and in the Southwest they are 1.1% undervalued.

Here is the daily chart for the America's Community Bankers Index , which represents 385 publicly-traded community banks.

Note that ABAQ (166.49) had overbought momentum when setting its 2012 high at 176.20 on Sept. 14, the day after the FOMC announced QE3. Note also that on Nov. 16, with ABAQ 158.38, the index was oversold. Today ABAQ is overbought again with the index between its 200-day simple moving average at 165.24 and its 50-day SMA at 168.22. This week's value level is 162.20 with monthly and annual pivots at 165.15 and 166.87 with quarterly risky level at 172.74.

Chart Courtesy of Thomson/Reuters

Profiling 24 Community Banks

Reading the Table

OV/UN Valued: The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

12 month trailing P/E

Assets: Add three zeros to get the total number.

C&D Loans: Add three zeros for total exposures.

Cons/RB: The C&D loan exposure versus risk-based capital.

CRE/RB: The CRE loan exposure versus risk-based capital.

Pipeline: The percentage of CRE loans outstanding versus loan commitments.

Value Level: The price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: is the price at which to enter a GTC limit order to sell on strength.

Observations:

• We have nine buy-rated bank stocks and 15 hold-rated stocks.
• Twelve banks are undervalued by double-digit percentages
• Fourteen banks have had double-digit gains over the past 12 months led by a 67.6% gain in SNV (SNV) . The only bank with a double-digit loss over the past 12 months is VLY (VLY) with a loss of 12.9%.
• All 24 banks are projected to be higher over the next twelve months, but by lower percentage gains of just 1.1% to 13.8%, led by SNV.
• We show that 22 of 24 banks have reasonable 12 month trailing P/E between 10.7 and 18.8. SNV has an elevated P/E at 25.7.
• The only bank overexposed to C&D loans is TCBI (TCBI)with a ratio of 111.7%.
• 23 of 34 banks are overexposed to CRE loans.
• Four banks have pipelines that are more than 80% funded.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at [e-mail].

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