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No Regrets So Far For Banks That Said No

Posted: Feb 20, 2009 14:45 PM by Eric Fox

Tickers in this Article: UMBF, CFR, BXS, BOH

Since most pundits have already pronounced the death of the U.S. banking system, insisting that nationalization is the only answer, it might surprise some investors that more than 60 banks turned down any capital infusions from the federal government. Most of the bank managements cited already high capital ratios and a desire to avoid government interference in their business, or perhaps they had a premonition about congressmen grilling them on their expense accounts and use of the corporate jet.

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Most of the rejections occurred in the fall of 2008, so it might be illuminating to see how some of them have fared now that a couple of quarters have transpired. The four banks discussed below had solidly profitable Q4s, and although they showed some signs of asset quality deterioration, it was not enough to impact capital levels materially.

Four Banks That Said No
BancorpSouth (NYSE:BXS) is headquartered in Mississippi and has offices all over the Southeast, including Florida, which is one of several ground-zero locations for bad loans. The company reported its Q4 last month. The bank earned $16.8 million, or 20 cents per share, and $1.45 for all of 2008. Bancorp did see stress in its asset quality, as non-performing loans and leases increased to 0.64% of the total. It's interesting that the company took an $8.6 million pre-tax write down of "other than temporary impairment" on some "pooled trust-preferred securities" in its portfolio. Even though the issues were current and performing, the write down was due to changes in fair value in the current market. Management displayed no regrets during its Q4 conference call.

"Even though we declined to participate in the Capital Purchase Program under TARP during the quarter, our capital structure at the end of 2008 strengthened compared to the end of 2007, and we continue to maintain ample sources of liquidity," said Aubrey Patterson, Bancorp's CEO.

Cullen Frost Bankers (NYSE:CFR) is headquartered in Texas and has $15 billion in assets. The bank was also solidly profitable in the Q4 and earned $53 million, or earnings per share of 89 cents. In 2008 it earned $3.50 per share. Non-performing assets as a percent of total loans increased to 0.88% of the total, but its Tier 1 risk-based capital ratio decreased only slightly sequentially to 10.3%. This is particularly interesting because the bank has $495 million in commercial real estate loans in its portfolio. (Learn more in Does The Basel Accord Strengthen Banks?)

Bank of Hawaii (NYSE:BOH) earned 81 cents per share in the Q4, about flat with the prior year. Non-accrual loans as a percent of total loans was a stunningly low 0.22% at year end. The bank had $2.46 billion in residential mortgage loans on its books, so apparently some banks out there know how to underwrite.

UMB Financial (Nasdaq:UMBF), a Midwestern bank headquartered in Missouri, reported non-performing loans as a percent of total loans of only 0.20% at the end of 2008. Like the other "no TARP" banks, UMB Financial did not avoid real estate loans, as 36% of its loan portfolio is in this sector.

No Regrets
The strong performance of many regional banks belies the notion that the entire banking sector is headed for insolvency. It would seem that so far, none of these banks that turned down government money has any regrets.

Find out how economic capital and regulatory capital affect risk management; see How Do Banks Determine Risk? and Analyzing A Bank's Financial Statements.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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