Community Banks Feeling Share-Price Pressure as Overexposure to CRE Loans Grows

The Federal Deposit Insurance Corp. indicates that community banks had a strong first quarter of 2017. These smaller banks reported net income of $5.6 billion, up 10.4% year over year. But, there are growing risks below the surface.

Today's focus is on 13 publicly traded community banks. Twelve increased their exposures to commercial real estate loans including construction and development loans.

At the end of 2006, bank regulators including the U.S. Treasury, the Federal Reserve and the FDIC established regulatory guidelines to exposures of these types of real estate lows versus risk-based capital. Overly simplified, exposures for C&D loans should not exceed 100% of risk-based capital, and exposures to CRE loans should not exceed 300% of risk-based capital. These exposures are shown in the right two columns in the table below.

Table of C&D Loans and CRE Loans at 13 Community Banks
Table of C&D Loans and CRE Loans at 13 Community Banks

Courtesy of the FDIC Quarterly Banking Profile for First-Quarter 2017

Only Green Bancorp (GNBC) reduced exposures to CRE loans, but they are overexposed with CRE lending at 468.7% of risk-based capital versus the 300% guideline.

All other banks increased their exposures and PacWest Bancorp (PACW) moved above the 300% threshold at 309.1%.

The banks overexposed to both C&D and CRE loans are BNC Bancorp (BNCN) , ConnectOne Bancorp (CNOB) , Home BancShares (HOMB) , Bank of the Ozarks (OZRK) and Texas Capital Bancs (TCBI) .

Here's the Weekly Chart for the First Trust Nasdaq ABA Community Bank Index Fund
Here's the Weekly Chart for the First Trust Nasdaq ABA Community Bank Index Fund

Courtesy of MetaStock Xenith

The weekly chart for the First Trust Nasdaq ABA Community Bank Index Fund ETF (QABA) is negative with the ETF below its key weekly moving average of $49.50, and is above its 200-week simple moving average of $38.83. Weekly momentum is projected to decline to 26.61 this week. Buy weakness to my quarterly value level of $46.15. My quarterly pivot of $49.42. Sell strength to my semiannual risky level of $54.80. 

Scorecard for the 13 Community Banks
Scorecard for the 13 Community Banks

BNC Bancorp--Buy weakness to my annual value level of $27.02. I show quarterly and semiannual pivots of $34.59. Sell strength to my monthly risky level of $40.08.

Commerce Bancshares (CBSH) --Buy weakness to my annual value level of $48.09. Sell strength to my quarterly and semiannual risky levels of $57.11 and $59.69, respectively.

ConnectOne Bancorp--Buy weakness to my quarterly value level of $21.22. I show an annual pivot of $24.44. Sell strength to my semiannual risky level of $27.86.

Green Bancorp--Buy weakness to my semiannual value level of $17.11. Sell strength to my monthly risky level of $21.55.

Hancock Holding (HBHC) --Buy weakness to my quarterly and semiannual value levels of $36.77 and $35.42, respectively. Sell strength to my monthly risky level of $55.60.

Home BancShares--Buy weakness to my annual value level of $21.06. My annual pivot is $24.16. Sell strength to my quarterly risky level of $27.89.

Investors Bancorp (ISBC) --Buy weakness to my annual value levels of $13.22 and $11.01. My quarterly pivot is $13.73. Sell strength to my monthly and semiannual risky levels of $15.42 and $16.19, respectively.

Northwest Bancshares (NWBI) --Buy weakness to my annual value level of $13.62. My annual and annual pivots are $17.53 and $17.81, respectively. Sell strength to my monthly risky level of $18.82.

Old National Bancorp (ONB) --Buy weakness to my quarterly value level of $14.28. Sell strength to my semiannual and annual risky levels of $17.53 and $17.81.

Bank of the Ozarks--Buy weakness to my annual value level of $43.53. Sell strength to my annual risky level of $52.71.

PacWest Bancshares--Buy weakness to my annual and quarterly value levels of $45.30 and $44.99, respectively. Sell strength to my monthly risky level of $58.33.

Texas Capital Bancshares--Buy weakness to my annual value level of $63.63. My semiannual and quarterly pivots are $72.97 and $73.45. Sell strength to my annual risky level of $82.97.

Umpqua Holdings (UMPQ) --Buy weakness to my annual value level of $16.50. Sell strength to my semiannual risky level of $22.88.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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