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) .

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