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Small Cap Regional Banks Continue to Rally

NEW YORK ( TheStreet) -- Frontier Financial (FTBK) and other small cap regional bank stocks continued to rally on a surge in volume, as it appeared traders were making bets that some of the low-priced names would avoid failure.

Frontier Financial shares rallied 146.3% to $7.34, bringing its two-session gain to more than 208%. More than 11.23 million shares changed hands by 1:25 p.m. EDT Monday, compared with the 50-day average daily volume of 227,000, according to the Nasdaq.

Similarly, Hampton Roads Bankshares (HMPR - Get Report), Atlantic Southern Financial (ASFN), Carolina Bank Holdings (CLBH - Get Report) and Bank of Granite (GRAN) all surged more than 30% on a spike in volume.

Wunderlich Securities bank analyst Kevin Reynolds said many of the small cap regional bank stocks were rallying on such high volume as traders made speculative plays on survival being realized. Prior to the recent move higher, Reynolds says several bank stocks were priced as if there was a reasonable chance they could all fail.

"When you are priced as if you could go to zero on any Friday, it's a pretty eye-popping percentage gain off of such a low base," Reynolds says. "When you fail, you are a zero. With hundreds of bank failures coming, survivability is a real question for some of these companies with severe credit issues. I would simply say that people are pricing in a higher probability of survival."

Reynolds adds that simply because a trader "decides to take a speculative flyer on a stock doesn't necessarily mean that it's going to make it."

On Friday, regulators shuttered seven Illinois banks, bringing this year's tally of failed U.S. banks and thrifts to 57.

For now, these regional bank stocks continued to rally. Among other winners, Crescent Banking Company (CSNT) jumped 70.3% to $3.32 and is now up 305% over the last two sessions. Dearborn Bancorp (DEAR) gained 22.7% to $4.86, up nearly 240% over the last week. Preferred Bank (PFBC) was up 22.2% to $2.81 Monday, good for a one-week gain of 80%.

Among other big winners Monday, Independence Federal Savings Bank (IFSB) was up 59.7% Monday to $2.30. Monarch Community Bancorp (MCBF) rallied 41.4% to $2.87.

-- Written by Robert Holmes in Boston.

Follow Robert Holmes on Twitter and become a fan of on Facebook.

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