Book Profits on These Community Bank Stocks Now

NEW YORK ( TheStreet) -- There are hundreds of community banks that are publicly traded, so why take the risk of investing in banks that are overexposed to commercial real estate loans or to construction & development loans?

There are 385 regional and community banks in the ABA Community Bank Index (ABAQ). Today I am profiling 14 names that have exposure to CRE loans.

Among these 14 bank stocks, two are rated strong buy by my Web site, www.ValuEngine.com, and eight are rated buy.

Even so, I am recommending that investors in these community banks book profits now. My reason is that these names have too much exposure to CRE and/or C&D loans, and these data are not factored into ValuEngine's ratings or those of any other stock-screening service with which I'm familiar.

ValuEngine ratings are based upon data from filings related to quarterly earnings reports. Real estate loan exposures are submitted in separate quarterly filings to the Federal Deposit Insurance Corp.

"Bank-Failure Friday" returned last week as the FDIC closed two community banks. The 48th bank failure for 2012 was a privately held bank in Tampa Bay, Heritage Bank of Florida, which had too much exposure to CRE loans, with a risk ratio of 776% of risk-based capital. (The regulatory guideline is 300%.)

The 49th bank failure of the year was publicly traded Citizens First National Bank ( PNBC) of Princeton, Ill., which had a CRE risk ratio of 881% of risk-based capital. This bank is also known as Princeton National Bancorp.

PNBC shares were trading at 17 cents at Friday's close, so a failure was priced into this community bank. PNBC did not become overexposed to CRE loans until the first quarter of 2010 when its risk ratio increased to 336%. This red flag put the bank stock on the ValuEngine list of problem banks. Subscribers to my ValuEngine FDIC Evaluation Report could have learned about this overexposure with the stock still trading at more than $7.00. Selling then would have been a much better strategy than watching the stock decline to zero.

The FDIC has closed 49 banks in 2012, bringing the total since the end of 2007 to 463. With the FDIC's nonpublished List of Problem Banks still above 700 insured institutions, look for additional Bank Failure Fridays over the foreseeable future. At ValuEngine we have an excellent track record of tracking the publicly traded community banks that have the overexposures to loans that could cause the FDIC to knock on the door some Friday afternoon.

Back on Sept. 6, 2012 I described the continued problems within the banking system in Community Banks Still Under Stress, and today the technicals are showing deterioration.

ValuEngine shows that the finance sector is 11.4% overvalued. Each banking region is local with different industry valuations. The Northeast is 20.9% overvalued, the Midwest is 4.1% undervalued, the Southeast is 21.7% overvalued, the West is 2.6% overvalued and the Southwest is 1.6% overvalued.

Evidence of "QE Fatigue" includes a negative weekly chart for the ABA Community Bank Index (169.05). ABAQ may be up 39.2% since its bottom in October 2011 and up 14.2% year to date, but Friday's close was below its five-week modified moving average at 170.01 with declining momentum.

This is a negative technical profile, where the risk is to the 200-week simple moving average at 153.36. My annual value level lags at 135.62 with an annual pivot at 166.87, and weekly, quarterly and monthly risky levels at 171.16, 172.74 and 175.59, respectively.

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 One-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.

Value Level: the price at which to enter a good-'til-cancelled 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: the price at which to enter a GTC limit order to sell on strength.

Investors and traders in community bank stocks sell all positions in these 14 names even though 12 are undervalued and 10 are rated buy or strong buy.

If you bought any of these stocks 12 months ago you can lock in significant gains in most of these, such as 69.5% for Texas Capital Bancshares ( TCBI) and 60.8% for Western Alliance ( WAL). These stocks have potential gains over the next 12 months, but not near a repeat of the prior 12 months.

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.
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 RSuttmeier@Gmail.com.

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