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Community Banks – More Revenue But More Exposures Too

Community banks earnings rose 7.4% year over year with $6 billion in net income in the third quarter.

The FDIC Quarterly Banking Profile for the third quarter continues to show increasing revenue for the smaller banks, but it also shows increasing loan exposures to commercial real estate lending including construction and development loans.

At the end of 2006, bank regulators including the U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation established regulatory guidelines for exposures to CRE and C&D loans versus risk-based capital.

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.

Nonfarm / Nonresidential Real Estate Loans represent lending to construction companies to build office buildings, strip malls, apartment buildings and condos, a major focus for community banks. This category of real estate lending expanded to a record $1.377 trillion in the third quarter, up 42.2% from the end of 2007. This is a potential problem as on-line shopping reduces traffic at America’s malls.

There are 1,518 community and regional banks overexposed to CRE lending, including 509 publicly-traded banks. The FDIC seems to continue to ignore the guidelines that banks should not have 300% or more of risk-based capital exposed to commercial real estate loans, which includes C&D loans.

Construction & Development Loans represent loans to community developers and homebuilders to finance planned communities. This was the Achilles Heel for community banks and the reason why more than 500 banks were seized by the FDIC bank failure process since the end of 2007. C&D loans rose to $330.7 billion in the third quarter up 2.1% from the second quarter, but 47.4% below the level at the end of 2007. There are 358 community and regional banks overexposed to C&D lending, including 72 publicly-traded banks. The FDIC continues to ignore the guideline that banks should not have 100% or more of risk-based capital exposed to risky community development loans.

Here’s The Weekly Chart For The First Trust NASDAQ ABA Community Bank Index Fund (QABA).

Courtesy of MetaStock Xenith

The weekly chart for QABA will shift to negative given a close on Friday below its five-week modified moving average of $51.58. The 200-week simple moving average or “reversion to the mean” is $40.99. This average was last tested at $32.91 during the week of Feb. 12, 2016. The 12x3x3 weekly slow stochastic reading is projected to decline to 73.68 this week down from 74.84 on Nov. 24. This key measure of momentum fell below the overbought threshold of 80.00 during the week of Nov. 17.

Trading Strategy: Buy weakness to my monthly value level of $48.44. Reduce holdings on strength to my semiannual and quarterly risky levels of $52.29 and $53.83, respectively.

Commerce Bancshares CBSH – Ended last week with a negative weekly chart. Buy weakness to my annual value level of $48.09. Reduce holdings on strength to my semiannual and quarterly risky levels of $57.25 and $61.39, respectively.

ConnectOne Bancorp CNOB – Ended last week with a positive but overbought weekly chart. Buy weakness to my annual and quarterly value levels of $24.44 and $23.09, respectively. My semiannual pivot is $26.80. I show an annual pivot of $24.44. Reduce holdings on strength to my weekly risky level of $27.58.

Green Bancorp GNBC – Ended last week with a negative weekly chart. Buy weakness to my quarterly value level of $19.07. Reduce holdings on strength to my monthly risky level of $23.99.

Hancock Holding HBHC – Ended last week with a positive weekly chart. Buy weakness to my semiannual value level of $40.50. My quarterly pivot is $48.78. Reduce holdings on strength to my weekly risky level of $49.28.

Home BancShares HOMB – Ended last week with a negative weekly chart. Buy weakness to my monthly value level of $20.55. Reduce holdings on strength to my annual, semiannual and quarterly risky levels of $24.16, $26.57 and $26.75, respectively.

Investors Bancorp ISBC – Ended last week with a positive weekly chart. Buy weakness to my annual value level of $13.22. Reduce holdings on strength to my semiannual risky level of $15.95.

Northwest Bancshares NWBI – Ended last week with a negative weekly chart. Buy weakness to my annual value level of $13.62. My semiannual pivot is $16.94. Reduce holdings on strength to my annual and quarterly risky levels of $17.81 and $18.66, respectively.

Old National Bancorp ONB – Ended last week with a negative weekly chart. Buy weakness to my semiannual value level of $16.07. Reduce holdings on strength to my quarterly risky level of $17.56.

Bank of the Ozarks OZRK – Ended last week with a negative weekly chart. Buy weakness to my monthly value level of $38.15. Reduce holdings on strength to my quarterly and annual risky levels of $48.44 and $52.71, respectively.

PacWest Bancshares PACW – Ended last week with a negative weekly chart. Buy weakness to my monthly value level of $41.86. Reduce holdings on strength to my annual and quarterly risky levels of $45.30 and $50.16.

Texas Capital Bancshares TCBI – Ended last week with a negative weekly chart. Buy weakness to my monthly value level of $71.04. My quarterly and semiannual pivots are $80.99 and $81.23, respectively. Reduce holdings on strength to my annual value level of $82.97.

Umpqua Holdings UMPQ – Ended last week with a positive but overbought weekly chart. Buy weakness to my semiannual and annual value levels of $18.50 and $16.50, respectively. Sell strength to my weekly risky level of $21.24.

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