NEW YORK (TheStreet) -- U.S. community banks generally are seeing improvements, according to the latest Federal Deposit Insurance Corp. data, and thus are worth consideration as investments.
But the same data, which cover the second quarter, also reveal some negatives that investors should keep in mind when picking stocks.
Read More: 7 Stocks Warren Buffett Is Selling in 2014
Today we're going to look in detail at the trends in this sector and select five attractive community bank stocks.
On the positive side, net income at community banks increased $166 million year over year in the second quarter to $4.9 billion. Community banks also increased lending year over year by a higher percentage than the entire banking system: 7.6% vs. 4.9%.
Commercial real estate loans (nonfarm/nonresidential) rose by 6.5% year over year for community banks, and unused construction and development loan commitments increased 7% year over year to $61 billion, which indicates stronger real estate lending in future quarters.
Meanwhile, the number of banks with commercial estate loan pipelines that are 80% to 100% funded has declined in the second quarter from the first quarter of this year, to 1,601 from 1,810. Pipeline risk peaked at 51% of all banks in third quarter of 2009 and is currently at 24%.
Another positive for the sector has been consolidation and the flushing-out of weaker players. The number of FDIC-insured financial institutions declined 1.1% sequentially, to 6,653 banks in the second quarter. Of that total, 6,163 are community banks. Their ranks declined by 71 in the second quarter from the first quarter of this year.
There were seven bank failures in the quarter and 40 mergers.
On the negative side, however, lower loan-loss provisions contributed to the higher earnings in the second quarter, and the number of U.S. banks overexposed to construction and development loans rose to 317 from 298 in the second quarter from the previous quarter, while exposures to overall CRE loans decreased sequentially only slightly, to 1544 from 1555.
It was overexposure to C&D loans that was Achilles' heel for community banks before the financial crisis. At the end of 2007, C&D loans totaled $628.9 billion. As bank failures began, this real estate loan category declined to a low of $201.6 billion in the first quarter of 2013. Since then, however, C&D loans increased to $223.2 billion at the end of the second quarter, up 11%. This is a sign that homebuilders are building new homes on speculation.