Book Profits in Community Bank Stocks

NEW YORK ( TheStreet) The FDIC Quarterly Banking Profile for the third quarter of 2013 continues to show that community banks remain overexposed to real estate loans. Many publicly traded community banks are trading near multi-year highs and, given data from the FDIC, ValuEngine, chart patterns and my proprietary analytics, it's time to book profits.

Two of the top 10 components of the 108 represented in the First Trust Nasdaq ABA Community Bank ( QABA) index fund include Commerce Bank Shares ( CBSH) and Zions Bancorp ( ZION), which are also in the regional bank index.

The number of banks on the FDIC's "Problem List" declined to 515 in the third quarter from 553 in the second quarter and is now 40% below the high of 888 set at the end of the first quarter of 2011. The number of problem banks remains well above the 76 reported in the fourth quarter of 2007.

The number of FDIC-insured financial institutions declined to 6,891 in the third quarter down from 6,940 in the second quarter. Within this universe are 1,152 publicly traded banks, including the 108 in the community bank index fund.

Another issue for community and regional banks is raising the capital to fund the Deposit Insurance Fund. The DIF balance rose to $40.8 billion at the end of the third quarter from $37.9 billion in the second quarter. Assessments and reduced estimated losses from potential failures are contributing to the rise in the DIF balance. The DIF reserve ratio rose to 0.68% on Sept. 30 from 0.64% on June 30, which is the percentage of estimated insured deposits.

By law, the DIF must achieve a minimum reserve ratio of 1.35% by the end of September 2020. This means that many community banks will need to raise additional capital.

The First Trust Nasdaq ABA Community Bank ( QABA) ($35.37) has a positive but overbought weekly chart profile with the five-week modified moving average at $34.46. My monthly pivot is $35.63, with a quarterly pivot at $36.04 and weekly risky level at $36.63. Last week's high at $36.08 was a test of the quarterly pivot and Monday's close was below my monthly pivot, which are warnings of a potential top for community banks.

Fundamentally the finance sector is 25.9% overvalued. This sector is by far the largest in terms of number of stocks, with 2,997 stocks in the finance sector. Only 2.5% have buy ratings and only 1.6% have sell ratings, so the finance sector has an equal-weight rating, with 82.2% rated hold.

At www.ValuEngine.com, we cover 16 major regional banks, which includes the four too-big-to-fail money center banks, which I profiled Tuesday morning in, Four Too Big to Fail Banks Set Multi-Year Highs.

Among community banks, ValuEngine covers 130 in the northeast, 148 in the southeast, 67 in the midwest, 77 in the west, and 37 in the southwest. In addition, we cover 135 savings and loans, including one of the 10 in todays table.

The FDIC Quarterly Banking Profile shows that 457 publicly traded community banks are still overexposed to commercial real estate loans down slightly from 461 in the second quarter. In addition, 215 have their CRE loan commitments 80% to 100% fully funded, which is another sign of financial stress.

Overall community banks are slowly deleveraging but stress continues. The Great Credit Crunch is thus not over.



The top 10 stocks among the 108 stocks in the community bank index fund have total assets ranging from $11.24 billion to $26.91 billion. All 10 have minimal exposures to C&D loans with ratios to risk-based capital between just 1.8% and 29.4%, where exposures above 100% face FDIC scrutiny.

The CRE to risk-based capital ranges from just 2.1% to 488.0%. Two banks have overexposures to CRE loans vs. the regulatory guidelines of 300%of risk-based capital. The CRE loan pipelines are between 42.2% and 75.3%, which is a positive as ratios of 80% and above are deemed too risky.

One of the stocks in todays table has been upgraded to buy from hold this morning. All others have hold ratings. The upgraded stock is 3.7% undervalued, while six are overvalued by 20.7% to 53%. All 10 have double-digit gains of 11.2% to 81.2% over the last 12 months. Nine of 10 are trading above their 200-day simple moving averages, which reflect the risk of reversion to the mean.

Reading the Table

OV/UN Valued: 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.

Value Level: 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: Price at which to enter a GTC limit order to sell on strength.

Associated Banc-Corp ( ASBC) ($17.17) set its multi-year high at $17.62 on Aug. 5 then held its 200-day SMA at the Sept. 23 low of $15.06. My annual value level is $15.72 with a monthly pivot at $16.88 and quarterly risky level at $18.77.

BOK Financial ( BOKF) ($62.52) has been trading back and forth around its 200-day SMA at $63.74 since Oct. 3. My annual value level is $61.63 with a semiannual pivot at $64.59 and monthly risky level at $65.17.

Commerce Bancshares ( CBSH) ($44.77) set a multi-year high at $45.77 on Nov. 25. My annual value level is $37.91 with a quarterly pivot at $46.12 and semiannual risky level at $47.20.

East West Bancorp ( EWBC) ($34.05) set its multi-year high at $34.71 on Oct. 29. The 50-day SMA is $33.52, with a monthly pivot at $34.87 and quarterly risky level at $35.31.

FirstMerit Corp ( FMER) ($22.79) set its multi-year high at $23.51 on Nov. 25. The 50-day SMA is $22.47 with a quarterly pivot at $23.62 and monthly risky kevel at $25.62.

Hancock Holding ( HBHC) ($35.00) set a multi-year high at $35.58 on Nov. 29. My semiannual value level is $33.57 with a quarterly risky level at $36.39.

Signature Bank ( SBNY) ($106.07) set a multi-year high at $108.96 on Nov. 21. My semiannual value level is $91.73 with a quarterly pivot at $100.56 and weekly risky level at $113.77.

SVB Financial ( SIVB) ($100.87) set its multi-year high at $103.36 on Dec. 2. My semiannual value level is $89.37 with a quarterly pivot at $99.48 and monthly risky level at $103.83.

Third Federal S&L ( TFSL) ($11.61) set its multi-year high at $12.49 on Oct. 28 and ended last week below its 50-day SMA at $11.96. This community bank is a savings and loan that was upgraded to buy from hold this morning. My quarterly value level is $10.22 with a monthly pivot at $12.09 and quarterly risky level at $12.47.

Zions Bancorp ( ZION) ($29.20) set a multi-year high at $31.40 on July 8, then traded to a second-half 2013 low at $26.79 on Sept. 30. The 200-day SMA is $27.47, with a quarterly pivot at $32.14 and semiannual risky level at $32.35.

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

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier is the chief market strategist at AlphaPlus Analytics in addition to ValuEngine.com. He has been a professional in the U.S. Capital Markets since 1972, transferring his engineering skills to the trading and investment world.

Suttmeier has an engineering degree from Georgia Tech and a Master of Science degree from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. He became the first long bond trader for Bache in 1978, and formed the Government Bond Department at LF Rothschild in 1981, helping establish that firm as a primary dealer in 1986. This experience gives him the insights to be an expert on monetary policy, which he features in his newsletters, and market commentary.

Suttmeier's industry licenses include, Series 7 and Registered Principal (Series 24). He has been the Chief Market Strategist for ValuEngine.com since 2008 and often appears on financial TV.

Click here for details on Suttmeier's "Buy and Trade" investment strategy.

Richard Suttmeier can be reached at RSuttmeier@Gmail.com

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