) -- Many investors are considering buying community banks in anticipation of an economic recovery on Main Street.

This bet is based on the assumption that the housing market has started to recover and that the community banks are about to increase lending to homebuilders and developers.

Even so, many community banks remain overexposed to commercial real estate loans, including construction and development loans.

Today I profile 29 of the publicly traded community banks that are reporting second-quarter earnings results this week. A goal of investors is to focus on banks near home. Seven are in the Northeast, 10 are in the Southeast, three are in the Midwest, and nine are in the West.

Last week I profiled four healthy community banks in my article

"Four Healthy Community Banks Worth Watching"

, and

Bank of the Ozarks


did not disappoint, trading to a new all-time high at $33.15 on Friday.

Commerce Bankshares

(CBSH) - Get Report

also moved significantly higher after reporting earnings.

My benchmark for community banks is the America's Community Bankers Index (ABAQ), which tracks more than 400 small publicly traded FDIC-insured financial institutions.

Source: Thomson Reuters

ABAQ (168.53) is up 38.8% since October 2011, and is up 13.9% year to date. The weekly chart above shows a rising momentum reading (12x3x3 weekly slow Stochastic) with ABAQ above its five-week modified moving average at 163.37 and above its 200-week simple moving average at 155.60. This is a positive weekly chart profile. My quarterly value level is 161.51 with an annual pivot at 166.87 and monthly risky level at 172.92.

Reading the Table

The table above shows the FDIC assets in billions, the construction and development loans in millions, the percent of C&D loans vs. risk-based capital, the percent of CRE loans vs. risk-based capital, and the pipeline, which is the total real estate loans outstanding vs. total real estate loan commitments.

Back in the fall of 2005, the

Federal Reserve

, Treasury and FDIC realized that community banks were loaning funds to the housing and real estate markets at a pace above what these regulators thought was prudent. Guidelines were set and monitored via quarterly filings to the FDIC. These guidelines were formalized at the end of 2006.

The first guideline states that if loans for construction, land development, and other land are 100% or more of total risk-based capital, the institution is considered to have loans concentrations above prudent risk levels, and should have heightened risk management practices.

The second guideline covers overexposure to construction and development loans including loans secured by multifamily and commercial properties. If loans for construction, land development, and other land, and loans secured by multifamily and commercial property are 300% or more of total risk-based capital, the institution would be considered to have CRE concentrations above prudent levels, and should employ heightened risk management practices.

Pipeline is the ratio of money lent on real estate loans vs. total loan commitments. A pipeline around 60% funded is considered healthy, while a pipeline ratio of 80% and higher is considered a potential problem. At 100% the bank has fully funded all real estate loan commitments.

OV/UN Valued: Community banks with a Red reading is undervalued, while those with a Black reading is overvalued according to ValuEngine.

VE Rating: 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 (%): Banks with a red number declined by that percentage. Those with a black number increased by that percentage. The performance has been mostly positive.

Forecast 1-Year Return: All numbers are black, so all 29 community banks in the table are projected to move higher over the next 12 months.

P/E Ratios: Community banks have some price-to-earnings ratios that are elevated, but most are favorable.

I highlighted in red the banks with overexposure in C&D or CRE loans or elevated pipelines.

The banks overexposed to C&D Loans are

Cardinal Financial



Home BancShares

(HOMB) - Get Report


Union First Market Bankshares

(UBSH) - Get Report


Overexposed to CRE Loans are

Boston Private Financial Holdings

(BPFH) - Get Report

, Cardinal Financial,

East West Bancorp

(EWBC) - Get Report


Fulton Financial

(FULT) - Get Report


Hanmi Financial

(HAFC) - Get Report

, Home BancShares,

Independent Bank

(INDB) - Get Report


MetroCorp Bancshares



Sandy Spring Bancorp

(SASR) - Get Report

, Union First Market Bankshares,


(UMPQ) - Get Report


Virginia Commerce Bancorp



Western Alliance Bancorporation

(WAL) - Get Report


Banks with a stuffed loan pipeline are East West, Hanmi, Home Bancshares, Virginia Commerce and Western Alliance.

It is highly unlikely that any of these 29 community banks will fail, but why take the risk with so many names to choose from? I would be conservative and use an investment strategy and not include the banks with two or three red marks.

Cardinal: Book profits because of two red marks with the stock at the multiyear high.

East West: This bank has a buy rating with two red marks. Hold if you are long. New potential investors should choose a different name.

Hanmi: This bank has not participated in the community bank rally even though it has a buy rating.

Home BancShares: This bank is the only one of the 29 that has three red marks. This is offset by a buy rating. If you are long this community bank consider booking profits as the bank is trading near a multiyear high.

MetroCorp: This bank is rated a strong buy despite an overexposure to CRE loans. This is one of the smallest banks shown in the Table, so it would not be my first choice. The stock is near a multiyear high, so consider booking profits if you are long this one.

Sandy Spring: This bank has just a minor overexposure to CRE Loans and has a hold rating. The stock has moving sideways the past two years ago, so it would not be on my buy list.

Union First Market: This bank has a buy rating but two red marks. This stock had a breakout above its 200-week simple moving average last week, but in my judgment there are better investment choices.

Umpqua: This bank has a buy rating with one red mark. The weekly chart is positive, but even so, consider other community banks from the table.

Virginia Commerce: This bank has a buy rating with two red marks, one being a pipeline that's 100% funded. This bank would thus not be on my buy list.

Westamerica Bancorporation

(WABC) - Get Report

: This bank has one red mark, and that's pipeline. This, plus a sideways price pattern over the past three years or so, takes the stock off my buy list.

Western Alliance: This bank has a buy rating with one red mark, but there are better portfolio choices.

At the time of publication, Suttmeier held no positions in stocks mentioned.

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