Bank of the Ozarks, Union Bankshares Are Community Banks to Avoid

NEW YORK (TheStreet) -- The number of FDIC-insured institutions declined to 6,730 in the first quarter from 6,812 at the end of 2013. This decline is among the smaller community banks that attempt to compete with larger regional banks moving into neighborhoods around the country.

The good news is 54% of all banks had year-over-year growth in quarterly earnings according to the FDIC's Quarterly Banking Profile for the first quarter of 2014. Just 7.3% were unprofitable down from 8.5% year over year.

But there are still some community banks to avoid including Bank of the Ozarks (OZRK) and New York Community Bancorp (NYCB) . The other three on my list are Cardinal Financial (CNL) , Dime Community Bancshares (DCOM) and Union Bankshares (UBSH) .

On June 11 I wrote 9 Community Bank Stocks on the Rise, Plus Must-See Charts for Traders. These are the community banks to bank on given a resumed economic recovery.

On June 16, I wrote Why the Big Banks Aren't Doing More to Boost the Economy where I profiled the reasons why the four "too big to fail" banks are not positioned to take leadership actions to help re-boot and economic recovery.

While there are promising statistics, noninterest income from the securitization and servicing or mortgages, the life's blood for banking, was just $4 billion in the first quarter, down 53.6% year over year. Loans for residential mortgages originated and intended for sale declined 70.6% year over year to $323.6 billion.

Realized income from securities "held-for-trading" were down 60.1% year over year to just $827 million as higher U.S. Treasury yields reduced market values for these investment portfolios.

Reductions in loan-loss provisions continued in the first quarter of 2014, but a drop of $7.6 billion was down 30.3% year over year. While this was the 18th consecutive decline, it's the second-smallest decline.

Compared to the end of 2007, the recovery in the banking system has further to go.

Residential Mortgages (1 to 4 family structures) -- down 19% since the end of 2007 to $1.822 trillion. These are loans on the books of the FDIC-insured financial institutions.

Nonfarm / Nonresidential Real Estate Loans -- higher by 15% since the end of 2007 to $1.118 trillion as community banks continue to lend for office buildings, strip malls, apartment buildings and condos.

Construction & Development Loans -- down 65.9% to $214.3 billion as loans to finance planned communities and homebuilders proved to be the Achilles Heel for community banks. This loan category has stabilized and has increased during the last two quarters.

Home Equity Loans -- down 17.1% since the end of 2007 to $503.5 billion and this category will continue to be hurt by loans at banks that do not service the first-lien mortgage. In addition some interest-only loans are now becoming normal loans where principal reductions are now required increasing monthly payments for borrowers.

Total Real Estate Loans -- down 17.8% since the end of 2007 to $3.658 trillion which is a key sign that banks are not ready to rebuild their core business, supporting the housing market on Main Street, USA.

Other Real Estate Owned -- may be down in recent quarters but at $29.4 billion is still up 141.9% since the end of 2007. Banks have slowed the reduction of these nonperforming assets making the bet that real estate prices will continue to rise. OREO peaked at $53.2 billion in the third quarter of 2010.

Noncurrent Loans -- while down significantly but at $195 billion is still up 77.5% since the end of 2007 after peaking at $405.4 billion in Q1 2010.

Here are the tables for the five banks community banks to avoid.

TheStreet.com contributor Jessica Sandoval disagrees with my assessment of New York Community Bank (NYCB) saying the bank is a solid dividend stock. That's what makes a market.

Crunching the Numbers with Richard Suttmeier: Moving Averages & Stochastics

This table provides the technical status for the stocks profiled in today's report.

There are five columns with moving average titles: Five-Week Modified Moving Average, 21-Day Simple Moving Average, 50-Day Simple Moving Average, 200-Day Simple Moving Average and the 200-Week Simple Moving Average.

The column labeled 12x3x3 Weekly Slow Stochastics shows the pattern on each weekly chart with readings from Oversold, Rising, Overbought, Declining or Flat.

Interpretations: Stocks below a moving average are listed in red.

Five-Week Modified Moving Average (MMA) is one of two indicators that define whether or not a weekly chart profile is positive, neutral or negative. The other is the status of the 12x3x3 weekly slow stochastic.

A stock with a positive technical rating is above its five-week MMA with rising or overbought stochastics.

A stock with a negative technical rating is below its five-week MMA with declining or oversold stochastics.

A stock with a neutral technical rating has a profile that is not positive or negative.

The 200-Week Simple Moving Average (SMA) is considered a long-term technical support or resistance and as a "reversion to the mean" over a rolling three to five year horizon. (even Apple declined to its 200-week SMA in June 2013)

The 21-Day Simple Moving Average is a short-term technical support or resistance used by many hedge fund traders to adjust positions. A stock above its 21-day SMA will likely move higher over a rolling three to five day horizon and vice versa.

The 50-Day Simple Moving Average is also a technical support or resistance used by many strategists and commentators in financial TV.

The 200-Day Simple Moving Average is another technical support or resistance and I consider this level as a shorter-term "reversion to the mean" over a rolling six to 12 month horizon. (even Apple tested or crossed its 200-day SMA in nine of the last 10 years)

Crunching the Numbers with Richard Suttmeier: Where to Buy & Sell

Value Levels, Pivots and Risky Levelsare calculated based upon the last nine weekly closes (W), nine monthly closes (M), nine quarterly closes (Q), nine semiannual closes (S) and nine annual closes (A). I have one column for pivots, which is a magnet for the period shown. The columns to the left of the pivots are first and second value levels. The columns to the right of the pivots are first and second risky levels.

Investors who wish to buy a stock should use a good-until-canceled GTC limit order to buy weakness to a value level. Investors who want to sell a stock should use a GTC limit order to sell strength to a risky level.

Crunching the Numbers with Richard Suttmeier: Data from the FDIC Quarterly Banking Profile

Total Assets add (000) so that the assets read as billions.

C&D Loans are construction & development loans to help new communities build roads and infrastructure.

C&D to Risk Based Capital -- if loans for construction, land development, and other land are 100% or more of total risk capital, the institution is considered to have loans concentrations above prudent risk levels, and should have heightened risk management practices.

CRE to Risk Based Capital -- if loans for construction, land development, and other land, and loans secured by multifamily and commercial property are 300% or more of total risk capital, the institution would also be considered to have a CRE concentrations above prudent levels, and should employ heightened risk management practices.

% Pipeline -- is the ratio between CRE loans outstanding versus loan commitments. Ratios 80% and higher indicates stress in that bank. A healthy pipeline is considered around 60%.

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

Follow @Suttmeier

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff

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Richard Suttmeier is the chief market strategist at ValuEngine.com.

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