Four Healthy Community Banks Worth Watching

NEW YORK ( TheStreet) -- Investors looking to buy community bank stocks have more than 1,100 to choose from, which means identifying the healthy banks can require a lot of research.

I've already done that heavy lifting and can help investors avoid banks that have too much exposure to commercial real estate loans.

On Thursday three healthy community banks report earnings: Lakeland Bancorp ( LBAI); Bank of the Ozarks ( OZRK); and Commerce Bankshares ( CBSH).

On Friday morning Webster Financial ( WBS) reports its quarterly results.

All four of these banks are worth watching.

Because there are so many publicly traded community banks, I will be periodically profiling them during second-quarter earnings season. The idea is to separate the healthy banks from those that have the exposures to commercial real estate loans including construction and development loans. I will also remind investors about pipeline risks that usually lead to a bank's listing on the Federal Deposit Insurance Corp.'s List of Problem Banks.

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.

ABAQ (164.84) has an overbought daily chart with the index above its 50-day and 200-day simple moving averages at 160.94 and 153.73, respectively.

With the technicals stretched in this way, good earnings news is factored into the share performance of community banks. I show a quarterly value level at 161.51 with an annual pivot at 166.87 and monthly risky level at 172.92. Below is risk to my annual value level at 135.62.

Chart Courtesy of Thomson Reuters

Bank failures continue in 2012, and one small nonpublic community bank bit the dust last Friday. The total for 2012 is now 32 bank failures, well below the pace of the past three years.

Since the end of 2007 when the "Great Credit Crunch" began, 446 FDIC-insured financial institutions have failed, and my prediction remains that more than 500 banks will fail before the credit crunch ends.

The FDIC's List of Problem banks fell to 773 from 813 in the first quarter of 2012, but this is still an elevated number.

At the end of 2007 the FDIC list had 76 banks on it, and since the end of 2009 the list has had more than 700 banks on it.

Because the FDIC does not disclose the names of the banks on its list, I study data from the FDIC Quarterly Banking Profile and publish the ValuEngine List of Problem Banks on www.ValuEngine.com.

We limit our list to publicly traded banks. The primary reason for producing this list is to help investors choose healthy community banks for investment and to avoid those that have too much exposure to commercial real estate loans and significant loan pipeline risk.

Four Healthy Community Banks

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 pipeline, which is the total real estate loans outstanding vs. total real estate loan commitments.

The pop-up table above also shows ValuEngine data. If a bank is undervalued, the percentage to which it is undervalued appears with a minus sign. If it's overvalued, the percentage will appear without a minus sign. There are also stock ratings (3-Engine is a Hold), (4-Engine is a Buy), the return over the past 12 months, the expected percentage gain over the next 12 months and the price-to-earnings ratios.

Lakeland Bancorp ($10.57) reports quarterly results on Thursday, and analysts expect earnings of 19 cents per share.

We rate the stock a Hold (3-Engine) and have a one-year price target of $10.84 (2.8% expected 12-month gain).

This bank has a modest overexposure to CRE loans, but the pipeline is a healthy 43.5% funded. The daily chart shows LBAI overbought with the stock above its 21-day, 50-day and 200-day simple moving averages at $10.17, $9.53 and $8.91, respectively. My monthly value level is $9.67 with a quarterly pivot at $10.83.

Bank of the Ozarks ($30.03) reports quarterly results on Thursday, and analysts expect it to report earnings of 52 cents per share. We rate the stock a Buy (4-Engine) and have a one-year price target at $32.36 (7.8% expected 12-month gain).

This bank has modest overexposure to both C&D and CRE loans, but the pipeline is a healthy 65.5% funded. This bank has been an acquirer of assets from more than one FDIC failure, so it is highly unlikely that this bank will fail. The daily chart shows OZRK overbought and above its 21-day, 50-day and 200-day simple moving averages at $29.36, $29.56 and $28.48, respectively. My weekly value level is $28.21 with monthly and quarterly risky levels at $34.39 and $35.24.

Commerce Bankshares ($38.20) reports quarterly results on Thursday, and analysts expect it to report earnings of 72 cents a share. We rate the stock a Hold (3-Engine) and have a one-year price target at $38.95 (2.0% expected 12-month gain).

CBSH is a member of the KBW Bank Index (BKX), is well within the risk guidelines for exposures to C&D and CRE loans, and its pipeline is a healthy 58.1% funded. The daily chart shows that CBSH has rising momentum and is above its 21-day simple moving average at $37.72, and between its 50-day and 200-day simple moving averages at $38.37 and $38.11.

My weekly value level is $35.58 with semiannual, annual and monthly pivots at $37.45, $38.59 and $38.52, respectively, and quarterly risky level at $41.78.

Webster Financial ($21.65) reports quarterly results before the bell on Friday, and analysts expect earnings of 44 cents per share.

We rate this stock a Buy (4-Engine), with a one-year price target at $23.17 (7.0% expected 12-month gain).

WBS is well within the risk guidelines for exposures to C&D and CRE loans, and the pipeline is a healthy 51.2% funded. The daily chart shows that WBS has overbought momentum and is above its 21-day, 50-day and 200-day simple moving averages at $21.01, $20.82 and $20.56, respectively. My weekly value level is $19.94 with quarterly and monthly risky levels at $22.37 and $23.06. Below is my semiannual value level at $16.08.

I advocate the use of good-'til-cancelled limit orders to add to long positions or become less short on share price weakness to the Value Levels. Traders should enter GTC limit orders to reduce the long positions or to add to a short position on strength to Risky Levels.

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

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