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.
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.
(I began to write about warnings in the banking system in April 2006 when I wrote for RealMoney.com. I predicted that at least 500 banks would fail. So far, 502 banks have failed since the end of 2007.)
When selecting stocks of publicly traded community banks, investors should focus on components of the ABA Nasdaq Community Bank Index (ABAQ). Before the financial crisis, this index consisted of 500 bank stocks with a waiting list of banks wanting to join. After many bank closings, failures and mergers in recent years, the community bank index now has 371 members, down from 374 in the first quarter.
I culled through the list and found five members of the community bank index that investors should consider as candidates for their portfolios. First, I narrowed the list to 28 stocks by eliminating those that had average daily trading volume of less than 300,000. Then I removed those with overexposures to C&D or CRE loans, which reduced the number of candidates to 17.
The five banks I chose have outperformed the community bank index and are trading above all five moving averages in today's first "Crunching the Numbers" table, with rising 12x3x3 weekly stochastics.
Commerce Bankshares (CBSH) is also a member of the KBW Bank Index. This bank is likely to look for growth through acquisitions as it is the smallest in terms of total assets of the 24 banks in the the KBW index.
Associated Bancorp (ASBC) is not in the KBW index but now has a larger asset base than Commerce at $25.6 billion vs. $22.9 billion for Commerce.
PacWest Bancorp (PACW) is one of the larger community banks with $15.4 billion in total assets.
Private Bancorp (PVTB) is close behind PacWest with $14.6 billion in total assets.
SVB Financial (SIVB) is one of the larger community banks with $31.6 billion in total assets.
Crunching the Numbers With Richard Suttmeier: Moving Averages & Stochastics
This table provides the technical status for the stocks profiled in today's report.
I show the trailing 12-month price-to-earnings ratios and dividend yields.
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 a reading of 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 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 level and as a "reversion to the mean" over a rolling three- to five-year horizon
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 level, and I consider this level as a shorter-term "reversion to the mean" over a rolling six- to 12-month horizon.
Crunching the Numbers With Richard Suttmeier: Earnings & Where to Buy & Where to Sell
This table presents the EPS estimates including date and before or after the close, and where to buy on weakness and where to sell on strength.
"EPS Date" is the day the company reports its quarterly results.
"EPS Estimate" is the EPS estimate from Wall Street analysts.
Value Levels, Pivots and Risky Levels are 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-'til-canceled 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.
At the time of publication the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff
TheStreet Ratings team rates COMMERCE BANCSHARES INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:
"We rate COMMERCE BANCSHARES INC (CBSH) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins, good cash flow from operations, increase in net income and growth in earnings per share. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
You can view the full analysis from the report here: CBSH Ratings Report
TheStreet Ratings team rates ASSOCIATED BANC-CORP as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate ASSOCIATED BANC-CORP (ASBC) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its expanding profit margins, reasonable valuation levels and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
You can view the full analysis from the report here: ASBC Ratings Report