Community Banks' Increasing Real Estate Loans Exposure Problematic

Community banks had a strong fourth quarter 2016, but recently-released federal data indicates that net income fell from the previous quarter, and increasing exposure to construction and development loans could threaten some of the banks' outlooks.

The Federal Deposit Insurance Corporation (FDIC), in its FDIC Quarterly Banking Profile released last week, said these smaller banks reported net income of $5.3 billion, up 10.5% year over year. While this seems great, the performance is below that of the third quarter, where net income was $5.6 billion, up 12% year over year. 

Today's focus is on 14 publicly-traded community banks, nine of which have exposures to construction and development loans and commercial real estate loans (CRE) that exceed regulatory guidelines established at the end of 2006. Overly simplified, exposures for C&D loans should not exceed 100% of risk-based capital, and exposures to CRE loans should not exceed 300% of risk-based capital. These exposures are shown in the right two columns in the table below.

 

The table above shows that nine of 14 community banks are overexposed to CRE loans with four also overexposed to C&D loans (both highlighted in red).

Here's a scorecard for the performances of the 14 stocks since the election.

 


Since all 14 are members of the community banks exchange traded fund, here's the weekly chart for the First Trust NASDAQ ABA Community Bank Index Fund (QABA) .

Courtesy of MetaStock Xenith

The weekly chart will shift to negative given a close on Friday below its key weekly moving average of $52.43. Weekly momentum is projected to decline to 72.27 trending below the overbought threshold of 80.00. Buy weakness to my quarterly value level of $46.63. My semiannual pivot of $54.80 was nearly tested at the March 2 high. Sell strength to my monthly risky level of $56.15.

BNC Bancorp (BNCN) - Buy weakness to my quarterly value level of $31.01. My semiannual pivot is $35.11. Sell strength to my monthly risky level of $36.69, tested at the March 1 high.

Commerce Bancshares (CBSH) - Buy weakness to my quarterly value level of $52.47. Sell strength to my monthly risky level of $59.90, tested at the March 1 high.

Cardinal Financial Corp (CFNL) - Buy weakness to my semiannual value level of $28.81. I show an annual pivot of $32.88. Sell strength to my monthly risky level of $36.64.

ConnectOne Bancorp (CNOB) - Buy weakness to my quarterly value level of $21.22. I show an annual pivot of $24.44. Sell strength to my semiannual risky level of $27.86.

Green Bancorp (GNBC) - Buy weakness to my annual value level of $11.76. Sell strength to my semiannual risky level of $17.11, which was tested at the Feb. 1 high.

Hancock Holding (HBHC) - Buy weakness to my semiannual value level of $35.42. Sell strength to my monthly risky level of $52.33.

Home BancShares (HOMB) - Buy weakness to my annual value level of $24.16. Sell strength to my monthly and semiannual risky levels of $29.87 and $31.31, respectively.

Investors Bancorp (ISBC) - Buy weakness to my annual value level of $13.22. Sell strength to my monthly and semiannual risky levels of $15.36 and $16.19, respectively.

Northwest Bancshares (NWBI) - Buy weakness to my quarterly value level of $16.62. Semiannual and annual pivots are $17.53 and $17.81, respectively. Sell strength to my monthly risky level of $18.82.

Old National Bancorp  (ONB) - Buy weakness to my quarterly value level of $14.28. My semiannual pivot is $18.18. Sell strength to my monthly risky level of $19.85.

Bank of the Ozarks (OZRK) - Buy weakness to my quarterly value level of $50.74. My annual and monthly pivots are $52.71 and $54.92, respectively. Sell strength to my weekly risky level of $57.87.

PacWest Bancshares (PACW) - Buy weakness to my annual value level of $45.30. Sell strength to my monthly risky level of $58.50.

Texas Capital Bancshares (TCBI) - Buy weakness to my annual value level of $82.97. Sell strength to my monthly risky level of $92.62, which was tested at the March 1 high.

Umpqua Holdings (UMPQ) - Buy weakness to my annual value level of $16.50. Sell strength to my semiannual risky level of $22.88.

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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