Regional Bank Warrants - A Quick Run-Through

Includes: MTB, VLY, ZION
by: Adam Jones

Many investors are familiar with warrants that trade on the large banks like Bank of America and Citigroup but there are also numerous warrants that trade on smaller regional banks.

These warrants have not gotten much attention and present interesting opportunities. There are warrants that trade on Zion Bankcorp (NASDAQ:ZION), Valley National (NYSE:VLY), and M&T Bank (NYSE:MTB).

All of the warrants discussed here were created as a result of the TARP program and were initially given to the US Treasury. They have since been auctioned off and are now publicly traded.

Warrants are similar to long-dated calls, or LEAPs. They enable the holder to buy a share of common stock at a fixed price on or before the expiration date.

With that said, they are better than LEAPs in several respects. The most obvious benefit of these instruments is their longer times until expiration. The longest dated LEAPs expire in January 2015 while the longest dated warrants expire in 2021 - so they can provide up to an additional 6 years of exposure.

Also, each warrant provides the right to buy one individual share at the specified price while LEAPs are only denominated in blocks of 100 shares. This gives investors more options in terms of holding size.

Lastly, some warrant strike prices are adjusted down when dividends above specified thresholds are paid to stockholders making them more valuable. Investors looking to trade regional banks should take a close look at the following warrants to determine if they provide better risk/reward for their portfolio than buying straight stock.

Zion Bankcorp & Warrants

Zion Bankcorp is a Pacific regional bank which is trading at book value. The stock has a PE ratio of 13.6 which is below the average PE for all regional banks in the KBW Regional Bank Index of 16.9. The company is in the process of retiring more expensive debt and replacing it with debt at a lower interest rate.

These warrants have an expiration date of May 22, 2020. The company has paid a dividend of $0.04 per quarter since May 2013, which is above the adjustment threshold of $0.01. As a result, the strike price of the warrants has already been adjusted down from $36.63 to $36.55 thorough a relatively complicated adjustment mechanism discussed in the warrant prospectus and explained in this article. Here's a link to the prospectus. Since these strike price reductions will continue as long as the company pays a dividend above $0.01, the long life of these warrants means the strike price could be reduced meaningfully by expiration.

Valley National Bankcorp & Warrants

Valley National is a Northeast regional bank. The company trades at 1.33 times book value. The warrants began trading at $2.20 per warrant in May 2010. They now trade for around $0.70. They have a strike price of $17.77 which is well above the current stock price of $9.95. The warrants have a dividend adjustment threshold of $0.1814 per quarter which is slightly above the current dividend of $0.163 per quarter. These warrants will have no value at expiration unless VLY nearly doubles in the next 5 years - but these warrants have significant leverage above that level. Here's a link to the prospectus.

M&T Bank Corp & Warrants

M&T Bank Corp is another Northeast regional bank. The company trades at 1.43 times book value. Warrants on MTB began trading in December 2012 for $26.50 each. They now trade around $39.00. The warrants have a strike price of $73.86 which is well below the current share price of $112.29. The strike price begins adjusting downward as the company pays a quarterly dividend over $0.70 per quarter. The company's current quarterly dividend is $0.70 per share so any dividend increase will begin reducing the strike price. Here's a link to the prospectus.

Below is a table summarizing the relevant information for each of the warrants discussed above. Some of these warrants are relatively illiquid which can present an opportunity for patient investor who can pick a price they want to buy at and wait for the market to come to them.



  Zion Bank Warrant Valley National Bankcorp Warrant M&T Bank Warrant
Current Stock Price ($) $28.51 $9.95 $112.29
Current Warrant Price ($) $5.63 $0.72 $38.96
Warrant Expiration Date May 22, 2020 November 14, 2018 December 23, 2018
Warrant Strike Price ($) $36.55 $17.77 $73.86
Time Till Expiration (years) 6.58 5.05 5.16
Total Stock Price Increase Required for Break Even ($) $13.67 $8.54 $0.53
Total Stock Price Increase Required for Break Even (%) 47.95% 85.83% 0.47%
Stock CAGR Required for Break-even (%) 6.14% 13.04% 0.09%

Using the table, the warrants that trade on M&T Bank are the best deals now. None of the warrants look particularly expensive relative to the current stock price except for the Valley National warrants, which require the stock to appreciate at over 10% per year until expiration to break even. The ZION warrants are also an interesting investment which should be considered because the strike price is currently being reduced by dividends the company is paying. Also, ZION warrants have the longest life, expiring in mid-2020. An investor interested in adding any of these to their portfolio should dig into the prospectuses for more information.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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