Regional Banks Finding Favor With Insiders

Despite recent mergers and all-time high stock prices, insiders at Firstar and Old Kent Financial are buying.
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The latest message from insiders is coming in loud and clear: There may be some hidden gems among the regional banks.

In select cases -- especially those at which insiders' accumulation marks a reversal of their previous behavior -- insiders are stepping up to the plate. And they're doing so at a time when merger integration issues and fears of higher interest rates have had a chilling effect on a number of these stocks, many of which have pulled back to their 200-day moving averages.

The most intriguing of these cases is



. The stock, having peaked at about 35 in mid-April, bottomed near 26 on June 17 before rebounding some 10%. As the share price stumbled, company insiders greeted the pullback by stocking up their own positions. In all, seven insiders picked up a total of 217,333 shares: 49,500 through option exercises, the remainder on the open market.

In an interesting twist, the biggest buyer at Firstar was not long ago an outsider. We last encountered Director David Garvin back in 1998, when his then employer


sold out to

Star Banc

-- which eventually became Firstar. Garvin was a big winner in that transaction. Now a Firstar insider, Garvin is once more buying up his company's stock. Make no mistake, we're much more accustomed to seeing an insider inherited through an acquisition selling stock rather than buying.

Over the years, we've also grown accustomed to insiders frequently selling Star Banc and Firstar. This latest round of buys, at prices so near all-time highs, marks a clear departure -- something we always watch for in this business. And it's happening just as

Wall Street

sorts through Firststar's integration of newly acquired

Mercantile Bancorp


To be sure, concerns linger in the wake of almost any merger. If nothing else, the recent insider buys provide some solid clues that insiders don't fear the unexpected. This especially seems to be the case because the company confirms that corporate arm-twisting -- that is, loans or executive stock-ownership guidelines -- played no role in the insiders' decisions.

A second regional bank that has our attention is

Old Kent Financial


. As the company was in the process of acquiring

CFSB Bancshares

in a stock swap completed on July 9, five insiders picked up 15,085 shares at prices between $46.31 and $47.24 per share. Interesting buys, considering they occurred near all-time highs.

But even more interesting is that insiders from the acquired company, CFSB, also picked up shares in advance of the deal: Eight insiders exercised options to acquire a little more than 280,000 CFSB shares. (Nothing illegal here. Insiders aren't penalized for exercising their options, even if they act before a deal is done.)

What's more, many of these were nonqualified options, and there are tax consequences associated with the exercise of nonqualified options. Specifically, by exercising nonqualified options -- and not selling the underlying shares -- insiders pay capital gains tax on their paper gain, even if that gain is subsequently wiped out by any fall in share price. This would hold even after conversion to Old Kent shares.

Clearly -- with CFSB trading as a proxy for Old Kent shares at the time the insiders exercised their options -- the option exercises implied a great deal of insider confidence in the post-deal performance of Old Kent shares.

The insiders' confidence at both banks is refreshing, particularly because it occurred at a time when executives inherited from acquired firms so often take the money and run.

Bob Gabele has been tracking and analyzing insider trading since 1978, most recently for First Call/Thomson Financial. This column is not meant as investment advice; it is instead meant to provide insight into the methods of insider trading. At time of publication, Gabele held no position in any of the companies discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabele appreciates your feedback at