Focus Article – Regional Banks

Insider buying usually tends to slow down around the start of each quarter as companies start reporting earnings. Insider buying dried up significantly over the last two weeks and the Insider Sell/Buy ratio is the highest it has been since last July if you discount the spike at the start of Q4 2011. The only insider purchases that stood out last week were a purchase of Center Bancorp (CNBC) by Director Lawrence B. Seidman and a purchase of First Citizens Bankshares (FCNCA) by Executive Vice Chairman Frank B. Holding.

As indicated in one of the daily reports, Mr. Seidman has been buying regional banks for over 26 years. Mr. Holding has also been buying First Citizen shares consistently since we started collecting insider data. The company has been trading close to or below book value for the better part of two years. Instead of writing about a specific company, I decided to take a closer look at the regional banking sector for this week’s focus article. We last wrote about the regional banking sector in April 2010 and used the 50 regional banks that were part of the KBW Regional Banking ETF (KRE) as a starting point for further research. We then identified a set of four regional banks that met the criteria set by the following four questions,

1. Did the total assets of the bank increase in 2009?
2. Is the Troubled Asset Ratio or TAR of the bank below the national mean of 14.5?
3. Does the bank have at least $10 billion in total assets?
4. Did the TAR drop or stay flat from Q3 2009 to Q4 2009?

The TAR is a very useful metric put together by the Investigative Reporting Workshop in partnership with MSNBC and is similar in nature to the famous Texas Ratio that was used in the 1980’s to identify troubled banks. The lower the TAR, the better the health of a bank. The national median TAR as of December 31, 2009 was 14.5 and has dropped over the last two years to end at 13.10 as of December 31, 2011.

The four banks that passed were Bank of Hawaii (BOH), UMB Financial (UMBF), East West Bancorp (EWBC) and Signature Bank (SBNY) . So how did these banks do over the last two years? One of them marginally underperformed the 8.33% return of the regional bank ETF KRE with a gain of 6.45%, another marginally outperformed KRE with a gain of 10.72%, a third outperformed KRE by 21.6% with a gain of 30% and the fourth outperformed KRE by a whopping 60% with a gain of 68.6%. As a group they delivered gains of 29% over the last two years. This compares with a loss of 1.74% for XLF, an ETF that mostly consists of larger banks, and a gain of 19.55% for the S&P 500.

Stock	Price April 1, 2010	Price March 30, 2012	Returns
BOH	45.42	48.35	6.45%
UMBF	40.41	44.74	10.72%
EWBC	17.77	23.09	29.94%
SBNY	37.39	63.04	68.60%
KRE	26.28	28.47	8.33%
XLF	16.08	15.8	-1.74%
SPY	1178.1	1408.47	19.55%

I decided to take a slightly different approach this time and instead of limiting myself to just the 50 stocks that constitute the regional bank ETF, I decided to screen the entire universe of regional banks to find banks that were trading below book value and had assets of over $1 billion. George at FatPitchFinancials.com has written an interesting post that discusses the results of back testing a group of 3,000 to 4,000 stocks based on their price/book ratios and as one would expect the companies with the lowest price/book ratios tended to perform the best. He also ran the back test for the price/tangible book ratio and noticed similar results. What was surprising however was the performance for stocks with the lowest price/tangible book ratio was only marginally better than those with the lowest price/book ratio. While our list includes regional banks trading below book value, we have also included a column that lists the price/tangible book ratio for these companies.

The 48 banks that made the cut are listed below sorted by their TAR. We have also indicated if the bank has seen its assets increase year-over-year and the number of insiders that have purchased shares over the last six months.Please note that some larger companies like PNC,  KEY and ZION that may not be strictly considered regional banks on account of their multi-state footprint also made the cut and we decided to leave them in the list. Some bank holding companies like ZION and WTFC are holding companies for a group of banks and for those companies, the TAR on the list is the TAR of their largest bank.

Regional Banks Trading Below Book Value (March 29, 2012)

Stock	Price/Tangible Book	Dividend Yield	Assets (Billion)	Y-o-Y Increase in Assets?	TAR *	Insider Purchases **
CRBC	0.9		$9.21	No	8.2	3
KEY	0.9	1.42%	$86.20	No	10.8	1
FFCH	0.66	1.82%	$3.14	No	12	14
ZION	0.67	0.19%	$17.53	Yes	12.2	3
WTFC	1.07	0.5%	$2.59	Yes	12.4	2
FCBC	1.09	2.99%	$2.14	No	12.9	4
WSBC	1.53	3.38%	$5.52	Yes	12.9	3
BFED	0.77	1.97%	$1.02	No	13.6	0
CMA	0.93	1.24%	$60.99	Yes	14.5	0
FDEF	0.81	1.19%	$2.05	Yes	16	3
FITB	1.28	2.28%	$114.54	Yes	16.1	2
FRME	0.98	0.32%	$4.15	Yes	16.2	3
PNFP	1.39		$4.85	No	16.2	1
CASH	0.8	2.48%	$1.36	Yes	16.3	0
FBIZ	0.78	1.47%	$1.00	Yes	17	4
CATY	1.18	0.23%	$10.63	No	20.1	1
PNC	1.41	2.19%	$263.31	Yes	20.2	3
STI	1.03	0.83%	$171.29	Yes	20.9	3
WAFD	1.09	1.9%	$13.65	Yes	21.9	0
PCBK	1.11	2.18%	$1.27	Yes	22	3
HFFC	1.07	3.8%	$1.22	Yes	22.3	2
HCBK	0.88	4.37%	$45.37	No	22.7	0
NASB	0.78		$1.18	No	22.9	0
UCBI	0.72		$6.98	No	23.4	10
RF	0.84	0.61%	$123.37	No	23.7	0
AF	0.92	5.27%	$16.98	No	24.3	1
FCZA	0.56	2.15%	$1.11	Yes	24.5	6
MBFI	1.18	0.19%	$9.79	No	24.6	0
FMBI	1.32	0.33%	$7.85	No	24.7	3
CVLY	0.52	3.21%	$1.01	Yes	25.4	3
FNLC	1.18	5.26%	$1.34	No	26.1	0
PVTB	0.93	0.26%	$12.39	No	29.3	6
FBC	0.9		$13.62	No	30.5	2
BXS	1.3	0.3%	$12.99	No	34.3	0
FIBK	1.11	3.28%	$7.29	No	34.5	2
HWBK	0.34	2.66%	$1.15	No	34.6	3
BKMU	0.72	0.99%	$2.50	No	37.8	1
RNST	1.38	4.18%	$4.20	No	39	1
PULB	0.76	4.8%	$1.33	No	40.3	4
EFSC	1.1	1.79%	NA	NA	42.7	0
BFIN	0.71	0.6%	$1.59	Yes	50	0
CITZ	0.6	0.7%	$1.15	Yes	60.5	5
WSBF	0.59		$1.71	No	70.5	2
UCFC	0.43		$2.04	No	70.6	1
FFKY	0.28		$1.23	No	77	0
GRNB	0.87		NA	NA	81.2	0
FSGI	0.08		$1.11	No	88.7	0
PNBC	0.33		$1.03	No	177	4

* The national median TAR across all reporting banks as of December 31, 2011 was 13.1

** Represents the number of insiders that purchased stock within the last six months.

According to the Investigative Reporting Workshop (the group that maintains the TAR ratio), banks had their best year in 2011 over the last 5 years with commercial banks posting the most profit since 2006 and credit unions posting their highest profit ever. Despite trading below book value, the stocks of several of the companies listed above are close to their 52 week highs after a big rally since last Fall that has far outpaced the returns of the major indices.

Several of these banks have either repaid their TARP money or have seen the Treasury Department auction their preferred shares. These banks are either reinstating their dividends or increasing them. I expect this trend to continue as the macro environment continues to improve but given the big run-up in some of these stocks, it may be prudent to build a watch list and start positions after the next correction. A few banks from the list above that are worth considering include Zion Bancorp (ZION), Wintrust Financial Corporation (WTFC), WesBanco (WSBC), Beacon Federal Bancorp (BFED) and Fifth Third Bancorp (FITB).