The Federal Deposit Insurance Corporation's Quarterly Banking Profile indicates that community banks showed stronger revenue and loan growth in the third quarter, outpacing the overall industry.

The FDIC showed that community banks reported net income of $5.6 billion in the third quarter, up 12% year over year. Loan growth increased by 9.4% year over year, led by commercial real estate loans, residential mortgages, and commercial and industrial loans.

Among the 5,980 FDIC-insured financial institutions, 5,521 are considered community banks. These smaller banks account for 43% of the small business lending on Main Street.

While this data is positive, don't rush to buy the shares of the 14 publicly traded community banks featured in today's tables. Instead, investors should consider booking profits, as these stocks have outpaced the positive news and all have overbought weekly charts.

Here's the data from the FDIC.

 

Residential Mortgages (one- to four-family structures) show the mortgage loans on the books of our nation's banks. Banks continue to increase their mortgage portfolios. Production rose to $1.99 trillion in the third quarter, but is 11.4% below the pace of the fourth quarter of 2007.

Nonfarm/Nonresidential Real Estate Loans represent lending to construction companies and homebuilders to build office buildings, strip malls, apartment buildings and condos, which have been a major focus for community banks.

This category of real estate lending expanded throughout the Great Credit Crunch and is now at a record $1.30 trillion, up 34.3% above the level of the fourth quarter of 2007. This is a potential problem, as online shopping is reducing traffic at U.S. malls. This is a key metric to watch during the 2016 holiday shopping season. Keep in mind that about 1,500 community and regional banks remain overexposed to CRE lending, and 500 are publicly traded.

Construction and 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 why more than 500 banks have been seized by the FDIC bank failure process since the end of 2007.

C&D lending has seen a solid recovery in recent quarters, rising by 3% in the third quarter sequentially to $303 billion, but still 51.8% below the level at end of 2007. C&D loans bottomed at roughly $200 billion at the housing market bottom, but there are still legacy bad loans on the books of community banks. There are 362 community banks overexposed to C&D lending, of which 77 are publicly traded.

Home Equity Loans represents second lien loans to homeowners who borrow against the equity in their homes. Many of these loans failed as homeowners became underwater on their original mortgages. Regional and community banks offer HELOCs, but these loans continue to decline quarter over quarter, despite the rise in home prices. HELOC lending declined 1.8% in the third quarter sequentially, and is down 26.8% since the end of 2007.

This loan category should be making a comeback, but it's not. The question is if banks want to lend in this loan category, and whether homeowners are prepared for increased monthly mortgage payments.

Total Real Estate Loans sums it all up. Growth in total real estate loans slowed to 1.3% in the third quarter, down from 1.9% in the second quarter, down 9.3% since the end of 2007. This is a sign that the housing market is not in full recovery mode and that bank stocks have outpaced where they should be trading in a slow-growth economy.

A year ago, after the Federal Reserve Open Market Committee raised rates, consumers closed their wallets, worried about the effect of rising rates on lines of credit and credit cards. On Wednesday, the FOMC did it again, raising the federal funds rate to 0.50% to 0.75%. Consumers and small businesses on Main Street may feel the pinch once again.

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