Move Out of Community Banks, FDIC Data Warn

The Federal Deposit Insurance Corporation has good news and bad news for investors in U.S. community banks. Here's the good news, according to the FDIC Quarterly Banking Profile for the first quarter.

  • Net income improved by more than 7% year over year for community banks but declined at the larger FDIC-insured financial institutions.
  • Net Interest Margin at community banks was 53 basis points above the larger banks.
  • The percentate of unprofitable community banks declined to the lowest since 1998.

Here's the bad news: Community banks have been increasing their loan exposures to commercial real estate loans, including construction and development Loans. The number of FDIC-insured community banks overexposed to CRE loans rose to 340 institutions, up 21% from a cycle low of 281 in March 2014.

Are banking regulators once again ignoring regulatory guidelines meant to control overexposures to real estate lending?

Here are the key lines from the FDIC first-quarter report.

 

Nonfarm/Nonresidential Real Estate Loans represent lending to construction companies and homebuilders to build office buildings, strip malls, apartment buildings and condos which has been a major focus for community banks. This category of real estate lending has increased by 29.2% since the end of 2007 to $1.25 trillion.

Construction & Development Loans represent loans to community developers and homebuilders to finance planned communities. This was the Achilles Heel for community banks and the major reason that more than 500 banks were seized by the FDIC since the end of 2007. The recovery in this real estate loan category has been solid in recent quarters. C&D loans were up 3.4% in the first quarter but are down 54.8% since the end of 2007. C&D loans now total $284.2 billion up from a bottom of roughly $200 billion, which includes legacy non-current loans.

Back in the fall of 2005, the Federal Reserve, US Treasury and the Federal Deposit Insurance Corporation (FDIC) realized that community banks were loaning funds to the housing and real estate markets at a pace above what these regulators thought as prudent. Guidelines were set and monitored via quarterly filings to the FDIC. These guidelines were formalized by the end of 2006.

They included the following stipulations:

Overexposure to construction and development loans: The first guideline states that 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.

Overexposure to Commercial Real Estate Loans: 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.

Here's a scorecard for 14 key community banks.

 

All 14 of these banks are components of the First Trust Nasdaq ABA Community Bank Index Fund (QABA) . The six shown in red are also components of the iShares U.S. Regional Banks ETF (IAT) .

BNC Bancorp (BNCN)  remains overexposed to CRE loans with an exposure of 487.4% of risk-based capital The stock has a positive but overbought weekly chart with the stock down 6.7%. Investors should reduce holdings at $23.99 and $24.94, which are key levels on technical charts until the end of June.

Commerce Bancshares (CBSH)  has been outperforming as it does not have overexposures to real estate lending. The weekly chart is positive but overbought with the stock up 11.7% year to date. Investors should reduce holdings as a close this week below its key weekly moving average of $47.41 will be negative.

Cardinal Financial Corp (CFNL)  has a slight overexposure to C&D loans but remains overexposed to CRE loans with a concentration of 483.1% versus risk-based capital. The weekly chart is positive but overbought so the strategy with the stock down 2.8% year to date. A close this week below its key weekly moving average of $21.86 will be negative. Investors should sell strength to $22.97, which is a key level on technical charts until the end of June. This stock is in correction territory 11.5% below its 52-week high of $24.99.

ConnectOne Bancorp (CNOB)  has increased their exposures to C&D and CRE loans at exposures of 139% and 604% of risk-based capital, respectively. The weekly chart is negative in recognition that real estate lending is a problem. The stock is down 15.8% year to date and is in bear market territory 30.2% below its 52-week high of $22.55. The stock is below $15.99, which is a key level on technical charts until the end of 2016.

Green Bancorp (GNBC)  has increased exposure to CRE loans to 458.3% of risk-based capital. The weekly chart is positive with the stock down 16.7% year to date and in bear market territory 44.7% below its 52-week high. The downside risk is to $7.33, which is a key level on technical charts until the end of 2016.

Hancock Holding (HBHC)  remains without overexposes to C&D or CRE loans. The stock is up 1.9% year to date and in bear market territory 22.3% below its 52-week high. The weekly chart will shift to negative given a close on Friday below its key weekly moving average of $25.73. The stock is below $29.70, which is a key level on technical charts until the end of 2016.

Home BancShares (HOMB)  remains overexposed to C&D and CRE loans with percentages of 110.5% and 483%, respectively. Despite this exposure the stock is up 7.8% year to date. The weekly chart is positive, but will not be given a close on Friday below its key weekly moving average of $21.38. The downside risk is to $19.39, which is a key level on technical charts until the end of 2016.

Investors Bancorp (ISBC)  increased their exposures to CRE lending to 381.6% of risk-based capital. The stock is down 7% year to date and in correction territory 11.9% below its 52-week high. The weekly chart is negative, which is reason enough to reduce holdings. The downside risk is to $10.68, which is a key level on technical charts until the end of 2016.

Northwest Bancshares (NWBI)  does not have overexposure to C&D or CRE loans. The stock is up 8.2% year to date and has a positive but overbought weekly chart with the stock just above its key weekly moving average of $14.32. The downside risk is to $12.59, which is a key level on technical charts until the end of 2016.

Old National Bancorp (ONB) -does have overexposures to C&D or CRE loans. The stock is down 5.9% year to date and in correction territory 14.9% below its 52-week high. The weekly chart will shift to negative given a close on Friday below its key weekly moving average of $12.76. A weekly close below $12.46 would be a huge negative as this level is in play for the remainder of 2016.

Bank of the Ozarks (OZRK)  has overexposures to C&D and CRE loans which are now at 211.5% and 503.8% versus risk-based capital, respectively. This large overexposure to C&D loans is a major reason the stock is down 24.2% year to date and in bear market territory 31.8% below its 52-week high. The weekly chart stays negative with a close on Friday below its key weekly moving average of $38.83. The stock is well below $42.84, which is a key level on technical charts until the end of 2016.

PacWest Bancshares (PACW)  has no exposures to CRE loans. The stock is down 7.6% year to date and in correction territory 18.5% below its 52-week high. A close on Friday below its key weekly moving average of $39.60 will shift this weekly chart to negative. The downside risk is to $22.32, which is a key level on technical charts until the end of 2016.

Texas Capital Bancshares (TCBI)  increased exposure to C&D loans to 121.6% of risk-based capital. The stock is down 1.9% year to date and in bear market territory 23.9% below its 52-week high. The weekly chart is positive but overbought with its key weekly moving average of $46.47. The stock is below $57.19, which is a key level on technical charts until the end of 2016.

Umpqua Holdings (UMPQ)  remains overexposed to CRE loans with an exposure of 386.5% of risk-based capital. The stock is down 4.4% year to date and is deep into correction territory 19.7% below its 52-week high. The weekly chart is negative with the stock below its key weekly moving average of $15.51. The downside risk is to $14.04, which is a key level on technical charts until the end of 2016.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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