Bailed-out banks will soon pay back the government at higher rates. Are these regional bank stocks in the clear?
One of the most complicated and controversial legacies of former President George W. Bush and his Secretary of Treasury Henry M. Paulson is the Troubled Asset Relief Program.
Commonly referred to as TARP, it was meant to solve a massive liquidity crisis that was threatening about half of the major US banks. You’ve probably heard of two – Bear Stearns and Lehman Brothers – that ended up declaring bankruptcy.
Aside from the larger controversy (whether mismanaged banks should be bailed out in the first place), one of the least popular parts of the program was that even healthy banks needed to accept taxpayer dollars in a bailout. Otherwise, the government ran the risk of watching the market pummel any bank that professed needing a bailout, negating the benefits of the program in the first place.
Now, while most of the major banks have already paid back their loans, and did so rather quickly, many smaller, regional banks have not. About 113 as of September 25, according to The Wall Street Journal. And it’s actually a pretty big deal, because these banks are about to start getting charged a kind of late fee. Paying back the government will get even harder for smaller firms that were already having trouble to begin with.
When the US government bailed out the banks, they essentially became shareholders, by buying up a lot of the bad debt and toxic mortgages that were spiraling out of control. The banks were then charged a 5% quarterly dividend, and, bit by bit, the banks were supposed to buy the government out.
To incentivize the banks to do this quickly, they set a target date: after five years of TARP assistance, the dividends will almost double, to 9%. That date is rapidly approaching for many banks, and it’s unclear if all of the banks will be able to keep up with the new payments.
Investing ideas
We decided to run a screen on regional bank stocks, to see which of the smaller banks may have done the best job of recovering from the financial crisis. Any company that is still running a lot of debt, especially if the holder of that debt is the our government, is probably going to be in some trouble, if they weren’t already.
So we limited our search to companies with less than 10 cents of debt for every dollar of equity. In other words, their long-term debt-to-equity ratios (LTDebt/Equity) are under 0.10.
Then, since these regional banks are less likely to grow as much as the kinds of stocks targeted by value investors, we made sure they are paying out decent dividends – at least 3%. We also looked at projected earnings per share growth (EPS) for the next year, as a potential indicator that the banks are being run well and adding to their earnings. Finally, we looked at forward price to equity ratios (Forward P/E), as a sign that the stocks might be close to fair value, if not undervalued.
We were left with 7 regional banks on our list.
Click on the interactive chart below to see data over time.
Do you see regional banks as solid investment opportunities? Use the list below as a starting point for your own analysis.
1. City Holding Company (CHCO, Earnings, Analysts, Financials): Operates as the bank holding company for City National Bank of West Virginia that offers community banking services to consumers and local businesses. Market cap at $669.00M, most recent closing price at $42.04.
Dividend Yield: 3.52%
LTDebt/Equity: 0.04.
Forward P/E: 13.50.
EPS Growth Next Year: 7.83%
2. First Community Bancshares Inc (Bluefield) (FCBC, Earnings, Analysts, Financials): Operates as a financial holding company of First Community Bank, N. Market cap at $317.61M, most recent closing price at $15.57.
Dividend Yield: 3.08%
LTDebt/Equity: 0.05.
Forward P/E: 12.29
EPS Growth Next Year: 5.58%
