Bank M&A Deal Volume, Pricing Remains Steady


Bank mergers and acquisition deals have remained at a steady pace so far in 2012, with 108 deals announced through July 9 having an aggregate deal value of $5.28 billion, according to SNL Financial.

The median price to tangible book value in the second quarter was 110.7 percent, compared to 116.3 percent in the first quarter, and 109 percent in the second quarter of last year.

In 2011, the median price to tangible book value was 106 percent and in 2010, it was 116 percent.

Federal Deposit Insurance Corp.-assisted deals were excluded from the figures.

In 2011, there were 177 transactions announced with a total deal value of $17 billion, compared to 215 deals in 2010 valued at $12.3 billion, according to SNL.

Other trends:

Since Jan 1, 2011, the Midwest has been the most active region for bank M&A, with 76 deals announced, followed by the Southeast, with 53.

The largest bank deal since Jan. 1, 2010, was McLean, Va.-based Capital One Financial Corp.‘s June 16, 2011, agreement to buy Wilmington, Del.-based ING Bank FSB for $9 billion, representing 102.2 percent of the target’s tangible book. This also marks the largest bank deal since 2008, when Wells Fargo & Co. acquired Wachovia Corp. for $15.1 billion. 

Bank stocks: “It’s really been a lost decade.”


audit12-hovde.jpgBank stocks rallied earlier this year but then faltered mid-year in the throng of worries about the European debt crisis.

“It’s really been a lost decade,’’ said Steve Hovde, the president and chief executive officer of The Hovde Group, an investment bank that focuses on  the financial services sector. He was speaking at Bank Director’s Bank Audit Committee Conference this month in Chicago.

Looking at bank stocks going back to 2007, when valuations reached their peak, the U.S. SNL Bank and Thrift index was down about 60 percent through May.

The current global outlook has put a good deal of pressure on bank stocks lately, as well. Even banks that don’t have exposure to European debt are feeling the heat, as the crisis will put a drag on the U.S. economy, Hovde said.  And a weak U.S. economy will do nothing for U.S. banks.

“Until we see a healthy economy, we’re not going to have a healthy banking sector,’’ he said. “Until we get employment back, the banking sector is going to have pressure.”

Housing

Housing still is a drag on the economy. Moody’s Analytics has predicted that home values, while improving in some markets, won’t return to pre-crisis levels until 2017. Home prices have lost about one-third of their value since hitting a peak in 2006, according to the Fiserv Case-Shiller composite index.

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Profits

On the other hand, banks have been getting rid of bad loans and improving their balance sheets. On the credit side, net-charge offs of bad loans are declining, and tangible capital ratios are slowly being rebuilt, Hovde said.

Profitability has improved, as well, as banks reduced their loan loss provisions year-over-year in each of the past four quarters.

Return on average assets has risen to an average of 1 percent in the first quarter of 2012, up from .76 percent in the fourth quarter of last year, according to the Federal Deposit Insurance Corp.

M&A

A strengthening bank sector has led to slightly better deal pricing in mergers and acquisitions, but deal volume is still very low.

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Uncertainty about commercial real estate and housing values still is hindering deals, as well as the fact that the stock of many buyers and sellers’ is trading below book value, Hovde said.

The glut of failed banks could also be putting a crimp on deals in some markets, and Hovde predicted that the Chicago area alone will probably have another 10 to 15 bank failures.  Nationwide, there were 403 banks with a Texas ratio greater than 100 percent as of March 31, according to SNL Financial LC. A Texas ratio greater than 100 is an indicator of potential failure. There were 59 banks with a Texas ratio greater than 300 percent, and 36 of them are in the Southeast.

Still, the pace of bank failures has slowed and many buyers are beginning to turn their focus to non-FDIC assisted deals, he said.

“With M&A I think we’ve probably hit the bottom and will probably see it pick up absent another global financial crisis,’’ Hovde said.

Analyst Report: Community Banks Saw Improving Metrics In The First Quarter


piggy-bank-health.jpgInvestment firm McAdams Wright Ragen has recently released its first quarter 2012 Community Bank Report which includes over 1,100 publicly traded banks and thrifts and provides data broken down by asset size as well as by region. The report is a unique look at many of the banks that aren’t traded on the NYSE Euronext or NASDAQ OMX, which so get little attention in the world of equity research. When looking at a bank’s asset size in comparison to the level of non-performing loans still held on the books, the statistics show a wide variation between the largest and smallest institutions. The average Texas ratio for the largest institutions (28 percent) is much lower than that for the smallest institutions, those with under $250 million in assets (43 percent). A similar story plays out in values. Banks above $25 billion in assets traded at an average of 129 percent of tangible book value. Banks below $250 million in assets traded at an average of 69 percent of tangible book.  Smaller banks have less access to capital markets, which could impact values, but many of them have more troubled loans on the books as well, which impacts the Texas ratio. A ratio above 100 percent is an indication of a potential bank failure.

When examining regional trends, every region has seen improvement in recent quarters in almost every important metric (price/tangible book, price to earnings ratio, Texas ratio, tangible equity/tangible assets). The three areas of the country where the banks have seen the greatest improvement in price and credit (the Southeast, Southwest and the Midwest) were hardest hit by the depression in the housing market and credit crunch. While these regions’ cumulative statistics have seen the greatest improvement since the third quarter of 2012, they still lag behind those of the Northeast and West.

The full report can be accessed here.

First Quarter Bank Earnings Beat Expectations


man-jumping.jpgInvestment bank Keefe, Bruyette & Woods had this summary on first quarter bank earnings:

Summary

Our sample of 165 banks under research coverage posted a better-than-expected quarter as 80 [percent] of banks beat or met consensus estimates. The operating environment continues to be difficult for the banking industry as low interest rates remain a significant impediment to sustained fundamental improvement. The low-rate environment in conjunction with competitive loan pricing, increased regulation, regional economic challenges, and excess liquidity have all helped to pressure revenues and compress profitability for the banking industry. In [the first quarter of 2012], the banks were able to offset some of these challenges as well as typical 1Q seasonality. We highlight several key overarching themes of 1Q12: loan growth rates varied widely, [net interest margins] came in more stable than forecast, asset quality and capital levels continued to improve, and solid mortgage banking revenues helped offset seasonality in fee income.

About 80 [percent] of banks beat or met estimates. For our sample of 165 banks, on an operating-per-share basis versus consensus estimates, 114 banks (69 percent) beat, 18 (11 percent) met, and 33 (20 percent) missed. This compares to 4Q11 and 1Q11 when 42 percent and 26 percent of the banks missed estimates, respectively.

[Midwestern and Western] banks had the most earnings beats while [Northeastern] banks had the least. Twenty-six of 30 (87 percent) [Midwestern] banks beat estimates while 27 of 33 (82 percent) [Western] banks beat estimates. Meanwhile, only 8 of 17 (47 percent) [Northeastern] banks beat estimates.

Annual [operating earnings per share] growth continued for the 10th consecutive quarter, at 24 percent in 4Q11, improving slightly from 4Q11 but down from 30 [percent] in 1Q11. [Year over year] comparisons remain influenced by the impacts of the financial crisis when banks built reserves and de-leveraged balance sheets. [Operating earnings per share grew 4 percent quarter to quarter].

[Net interest margins or NIMs] were better than expected, with 44 [percent] and 52 [percent] of banks posting [year over year] and [quarter over quarter] NIM expansion, respectively. The median NIM was 3.73 [percent], down 1 [basis point year over year] but up 1 [basis point quarter over quarter].

Banks with strong capital and profitability continue to garner premium valuations. 

Loan growth results were mixed. 

Credit and asset quality improvement continues. The median [net charge off] ratio fell 22 [basis points year over year] 14 [basis points quarter over quarter] to 0.53 [percent].

2013 estimates changes were evenly distributed as 32 [percent] of banks saw estimates increase by 6 [percent] on [average], and 28 [percent] had estimates cut by 7 [percent] on [average]. Among large regionals, 40 [percent] had their ’13 estimate cut by 8 [percent on average].

What’s Ahead?


Peyton Green is a senior research analyst covering banks and thrifts at Sterne Agee & Leach in Nashville, Tennessee. He talks about why he thinks bank stock valuations will improve this year, and predicts which banks and thrifts will do better than most.

Stock valuations for banks have been improving. M&A pricing has improved slightly.  What do you expect for this year?

Six months ago, we were more bullish on bank stocks because valuations were lower than they had been a year before and more of the companies had positive catalysts in play. We thought the market offered a good opportunity to buy at a good valuation. Fast forward to today and the market has recognized a lot of the value for those catalysts. In September and October and August, when the market was falling apart because of European markets, we realized the world doesn’t all come to an end. Banks ultimately are a voting machine for the local economy. What you’ve seen year-to-date in the movement in bank stocks is the result of better economic moves on the U.S. front, rather than what’s going on in the rest of the world. I don’t know that there are many more people buying bank stocks than a year ago, but there are less people selling them. The average investor has been underweight on bank stocks for the better part of three out of the last five years. Not many of the companies have much growth. A lot of the movement in bank stocks last year was because of credit losses coming down. The best stocks that we’ve seen over the past two years have had good growth prospects.

What about this year?

I think the valuations will do surprisingly better than people expect. Everybody was worried to death about the economy getting worse but it’s gotten a little better. The other wild card that could develop is live bank M&A [not FDIC-assisted deals]. Live bank M&A is slowly starting to pick up. We’ve seen more action in the past year in economies that were less affected by the economy, for example, Louisiana and Texas, the Northeast and the MidAtlantic. Over the course of the next year, we should see that broaden out into other geographies. M&A always causes investor activity in the sector to pick up. That doesn’t mean [bank stocks are] going to go straight up. I think the sector, like the market as a whole, is due for a bit of a pull back.

Forward Looking Statement: What are your favorite stocks?

We think the barbell approach works, where you buy quality banks that benefit from an uneven playing field created by the recession. Also, we like banks that are coming out of the recession and have more improving credit leverage. We like UMB Financial Corporation in Kansas City, Missouri. It is more of a financial services company with non-bank financial services, such as asset management, wealth management and securities processing [back office operations for mutual funds and hedge funds, etc.] that make up 28 percent of the revenue base. Those businesses have been growing at a double-digit rate the last couple of years. Loans for the bank are up 6 percent to 8 percent per year and deposits have grown 10 to 15 percent per year and charge-offs have been in the 50 basis point range.

Signature Bank in New York has been able to take market share because it competes with all the too-big-to-fail banks. Once things settle down, it will be a great opportunity to pull market share and hire banking teams.

On the credit leverage side, we like MB Financial, Inc. in Chicago. The company has provided for loan losses of about 12.9 percent since the end of 2007 and charged off about 11.6 percent of its loan book, so it has been a very difficult cycle. But [recently], it was able to redeem TARP Preferred [Troubled Asset Relief Program stock] without any kind of common raise or debt offering. We think results will improve significantly this year. We would expect the Chicago metropolitan area to improve this year to provide economic opportunities.

One that will be a stock to own during the next couple of years, maybe not the next couple of quarters, is TCF Financial Corporation in Wayzata, Minnesota. We feel like the stock is really in its fourth bad year. We just think things will start improving this year. They went about a balance sheet restructuring where they sold a good portion of their bond portfolio and got rid of high cost offerings and it’s going to benefit earnings by about 30 cents per share going forward. They had a lot of [nonsufficient funds] fees and debit card interchange fees so they got hit on both ends [by new regulations limiting those fees]. They had 40 percent of their loan portfolio in residential mortgages in Michigan, Minnesota and Illinois. Those three states have been more adversely affected from a credit perspective than other states in the Midwest. We think this is a year where real estate values will start to stabilize and incomes start to increase a little and the bank will start to get some relief in 2013.

One of the best live bank M&A opportunities recently was executed by Hancock Holding Co. It bought Whitney Holding Corp., in June of last year. It was an $8-billion asset bank buying a $12-billion asset bank at the bottom of the cycle. We think this will be very good for Hancock shareholders and Whitney’s shareholders.  We think they’ll make $3.15 per share in 2013 and the street is predicting $2.90 per share. They have more opportunity for cost saving and their growth profile is going to start to pick up over the balance of the year.

We’ve had record high deposits in banks and low interest rates. Do you see that as a problem for the banks you cover?

There has been a ton of cash pumped into the system and that cash has found its way onto bank balance sheets, in part because people are less enamored of the money market funds. There is talk about regulating that industry. There also is simply the cyclical component where companies and consumers are deleveraging. We would expect those deposits to move out eventually. This year, as you see a pick-up in loan growth, you’d expect commercial depositors to use their depository liquidity first and then borrow money, but you simply never know. It is something we worry about in the longer run. If there was a shock in interest rates, we would worry about it and expect a behavior change.

Stock Retrospective

Scott Siefers, managing director at Sandler O’Neill + Partners, follows up on his prediction that Wells Fargo & Co, PNC Financial Services and U.S. Bancorp would all perform well, despite the economic environment. 

“The one thing that has changed is the economy appears to be on slightly more solid footing than a few months ago,’’ he says. “Those are still the best names, but the group as a whole has performed better as a result of the economic improvement. The names that have done really well have been high-risk names, such as Bank of America. PNC and U.S. Bancorp did well last year, so they’re starting off in a better position so the relief rally isn’t going to affect them.”

“The jobs side of the economy is gaining a little traction. I can’t say I feel great about real estate. We’re plotting along on the bottom but at least some of the macroeconomic indicators are improving with a bit more traction. Where I can’t say I feel great is the [interest] rate side of the equation. As long as rates stay down, the tougher it is going to be for banks.”

Southeast Bank Stock Multiples Improve, and M&A pricing gets better


southeast-map.jpgMonroe Securities Inc., an investment banking firm in Chicago that specializes in community banks, had this report on community banks in the Southeast:

The first quarter saw a marked improvement in bank trading multiples, as evidenced by an increase in the region[‘s] average price to tangible book ratio. The Southeastern Independent Bank Review (SIBR) average increased to 0.78X [times book value], from 0.66X in the fourth quarter, the largest increase since 2002. The broader surge in the market was helped by perceived improvements overseas as well as the Federal Reserve’s announcement that most banks passed [the] latest round of “stress tests.”

Although investors have been rewarding banks for positive earnings, more emphasis continues to be placed on the ability to control asset quality. Investors see decreases in the NPA [non-performing assets] ratio as an indication of a bank’s ability to maintain positive earnings, through a reduction in the possibility of future period write-offs. We expect that as asset quality continues to improve and banks continue to remain profitable, valuations will trend upward.

Size still matters as banks need to be big enough to weather any potential economic “storms.” However, profitability and (to a greater extent) asset quality are key in the eyes of investors. This should not come as a surprise, especially for the Southeastern region, which has been particularly affected during this recession.

Merger Activity on the Rise?

So far this year we have seen an uptick in deal activity nationally, as 49 deals were announced in the first quarter. Pricing multiples were on the rise [in the Southeast] as well, as the average price to tangible book value was 1.24X compared to 1.00X in the fourth quarter. High priced transactions in the Northeast and Southwest regions led to the increase. Banks receiving higher multiples were characterized as having low NPA ratios (less than 2%), strong capital, and above average profitability. In the Southeast, sale price multiples are improving but infrequently exceed tangible book values due to higher overall NPA levels. We believe increased merger activity shows that bankers are increasingly beginning to realize the need to pursue strategic growth opportunities, rather than wait for the return of mid-2000 level deal values that may never materialize.

For a full copy of the report, click here:

Structuring Director Pay: How Other Banks Do It


anna-bebc.jpgAnna Barnitz estimates she spends about eight hours per week on board matters as an independent director for a bank in Ohio.

“That has become a little challenging,’’ she says. “Right now, I’m on seven committees of the bank.”

Bank directors are working quite a few hours these days on board business, more than in previous years, and many of them have full-time careers outside the bank, like Barnitz does. Barnitz is the chief financial officer of family-owned Bob’s Market and Greenhouses.

She also serves as compensation committee chairman for Ohio Valley Banc Corp, the $824-million-asset holding company for Ohio Valley Bank. A few years ago, the bank reduced its board from 13 to nine members and she’s had extra work to do to prepare for increased regulation regarding executive pay. The board has a mandatory retirement age of 70, but it’s been thinking of moving that up to 72, to deal with a dearth of qualified directors who want to do the job.

Henry Oehmann III, the director of national executive compensation services at audit, tax and advisory firm Grant Thornton LLP, says what Barnitz is going through is typical. On an hourly basis, directors are losing compensation because they’re working more hours without more pay.

He imagines that it might be appropriate to pay compensation committees members more, given their increased responsibilities lately.

gt-bebc.jpgBank directors for banks with less than $1 billion in assets get paid a median of $26,830 per year, according to Grant Thornton. That means half of the directors got paid more and half were paid less. For banks with $1 billion to $5 billion in assets, the median pay is a little more, $39,243. Pay really jumps for large banks, or those with more than $5 billion in assets. Directors on those boards get paid $81,581 as the median. The results are similar to Bank Director’s own research on bank director pay, conducted last summer.

Directors of banks in the Southeast get paid the least: just $33,528 as a median, which isn’t surprising, given the region’s economic troubles. Northeast bank directors get paid the most: $54,681 per year.

Oehmann and Justin Waller, a senior associate with Grant Thornton, presented some advice for boards considering pay at Bank Director’s Bank Executive & Board Compensation conference recently in Chicago:

  • Anchor the director’s pay with a significant annual retainer designed to serve as a basis for the director’s commitment to the director role.
  • Employ a mix of cash and stock-based pay with the target of at least 50 percent of the director’s total compensation in company stock.
  • When setting committee and board meeting fees, set fees based on market competitiveness and current activity level. If activity level is high, meeting fees can drive total board pay well above competitive market levels. Year-to-year swings in director pay can be minimized if retainer makes up a larger component of total compensation.
  • Keep in mind that many banks pay both holding company and bank meeting fees; but most banks pay only one meeting fee if the holding company and bank board meet on the same day.
  • Most banks differentiate pay if the director attends in person versus via telephone.
  • Equity-based pay includes stock and stock options; the trend is a move away from options to full value stock awards.
  • Many banks have director ownership guidelines where a director is required to own a fixed amount of bank stock.
  • Deferral of board fees and stock deferrals are frequently used to provide a tax benefit, as well as achieve ownership goals.

Using an ESOP to Raise Capital


Privately held community banks have had a tough time raising capital during the financial crisis and its aftermath. Investors are cautious and community banks have been especially challenged due to the economy’s troubles and investors’ desire for liquidity. One option for those banks is an Employee Stock Ownership Plan, or ESOP. Basically, an ESOP is a tax-qualified retirement plan that benefits all employees who meet certain criteria, such as 1,000 hours of service. An ESOP can use the tax deductible contributions made by a bank or bank holding company to purchase newly issued stock, thereby returning the cash to the balance sheet of the bank or holding company. These funds improve capital strength and could also be used to repay funds to the federal government’s Troubled Asset Relief Program. W. William Gust, J.D., L.L.M. of Corporate Capital Resources and Andrew Gibbs of Mercer Capital discuss some of the benefits of ESOPs and how they might help a bank raise capital.

How does it work?

The bank or bank holding company makes contributions to an ESOP, either in stock or cash, subject to certain limits. These contributions are allocated among participants in proportion to compensation or compensation plus length of service. An ESOP may use its cash to purchase newly issued shares or existing shares held by non-ESOP shareholders, as well as to purchase shares from participants exiting the plan.

What are the benefits of ESOPs for a bank?

Unlike retirement plans such as 401(k)s, ESOPs can purchase shares of the sponsoring S or C corporation. An ESOP can borrow money to purchase stock. Principal payments on the acquisition loan are tax-deductible. The ESOP is treated as a single, tax-exempt shareholder. S corporation ESOPs do not face the tax liability that otherwise would pass through to shareholders. As a hypothetical example, if the bank contributes $100 to the ESOP, it could save $40 in taxes and use the savings to purchase more bank stock, either to repay TARP or meet other capital raising goals. Because contributions are tax-deductible, purchasing newly issued shares is accretive to total equity, although the transaction would dilute the ownership interest of non-ESOP shareholders. While TARP requirements preclude key executives from non-qualified and discriminatory plans, they do not apply to ESOPs.

Why do banks make more use of ESOPs than companies in any other industrial classification?

Closely held banks often need a mechanism to acquire shares efficiently. An ESOP permits containment of the number of stockholders through an untaxed mechanism ultimately under the governance of the board. Most bank ESOPs are minority-interest owners.

What benefits do they have for participants?

The participants receive a retirement benefit as an equity interest in the sponsor at no cost to themselves. ESOPs typically reward loyal, long-term employees through vesting schedules, eligibility rules and the like, which cause the bulk of the plan assets to accumulate in their accounts.

In what instances would an ESOP not be appropriate?

ESOPs require a profitable sponsor, the ability to create value over time and a sufficient number of employees to meet the various compliance tests. Companies with fewer than about 25 employees or profits below about $500,000 (pre-tax, pre-ESOP) are not suitable, though there are exceptions. Since they have a market, widely traded public corporations do not often use ESOPs. Highly leveraged ESOPs often are inadvisable.

Who controls the stock?

The trustees are the legal owners who vote the stock for private corporations, except for major transactions. Participants in public company ESOPs vote all shares allocated to their accounts.

How is value established?

The trustee establishes value. For privately held banks, the trustee engages an independent appraiser to value the stock. Valuing banks in the current regulatory and economic environment is challenging; banking industry and ESOP expertise should be key considerations for the trustee in appraiser selection. Appraisers will consider numerous factors and apply specific valuation methods considered most appropriate. Draft regulations from the U.S. Department of Labor provide guidance specific to shares held by ESOPs.

Third quarter earnings review: bank stocks rally as clouds thin


cloudy-skies.jpgRenewed optimism from the Eurozone, in-line or better than expected domestic economic data, and solid third quarter performances all have contributed to a widespread rally in stocks. The BKX index (comprising 24 large-cap banks) was up 2.4 percent and the S&P 500 was up 1.1 percent for the week ending Oct. 21.

We believe that the banks can continue to display strong price performances as we witness thinning investment clouds related to the Eurozone, sustainability of the economic recovery, regulatory environment, and the mortgage mess. The industry should also benefit from a substantial underweighting of bank stocks in institutional portfolios, relatively low expectations, valuations well below historical levels, and loan loss reserve and capital levels near all-time highs. Once global fears lessen, we expect bank stocks to perform relatively well in a slow growth environment marked by gradually improving fundamentals and double-digit growth in earnings.

Quarter-to-date, all but one of the nation’s 40-largest banks (comprising our industry average) has posted gains, with 35 banks up more than 5.0 percent and our industry average up 11.4 percent. Thus far in fourth quarter, the BKX index has advanced 10.1 percent and the S&P 500 has risen 9.4 percent. In the third quarter, the BKX index was down 26.9 percent and 14.3 percent for the S&P 500. Second quarter 2011 earnings, encouraging as they may have been, were undermined by distressing macroeconomic, political, and regulatory headlines. The last time banks traded at these price levels was in July 2009, when we were also confronted with similar concerns. However, fundamentals have substantially improved over the past two years and the industry appears well positioned to withstand another economic downturn with relatively little pain.

Bank balance sheets have been fortified, capital and reserve levels are near all-time highs, the system is flooded with liquidity, the irrational players have been removed, and we have few accounting or regulatory rules to change.  Granted, the implementation of Dodd-Frank will be a longer-term drag on profitability, but offsets and constructive changes are likely to follow a Republican victory in November 2012.

We are likely about two years away from normal profitability levels, and many banks trade at very attractive valuation levels with estimated double-digit growth rates for net income through 2013. Based on Street estimates (which have already been substantially adjusted for the very low interest rate environment), we expect our industry average to post earnings per share advances of more than 40 percent in 2011 and more than 25 percent in 2012. Yet, among the nation’s 40-largest banks, 27 trade below book value with the weighted average price-to-book ratio at 92 percent and the weighted average 2012 estimated price to earnings ratio at 9.6x (compared to about 150 percent and 12.5x, respectively, for our 15-year industry average).

Thus far in the third quarter earnings season, results have been highlighted by improved credit quality, accelerated growth in commercial loans, and increased mortgage banking income. Also, expense savings programs and balance sheet adjustments have become more prevalent as banks look to mitigate anticipated margin contraction from the current interest rate environment. Market-related revenue has been very weak (as expected) due to seasonality and market disruptions this quarter, but generally in-line or better-than-expected earnings per share has been driven by accelerating loan growth, strong mortgage banking gains, lower provision levels, and tighter control of operating expenses. However, the flattening of the yield curve and anemic balance sheet growth should continue to put downward pressure on the net interest margin (NIM).

Bank stocks plummet: It’s the economy, stupid.


stock-plummet.jpgThe stock market has been filled with irony (not to mention misery) lately.

Investors flocked to the safety of U.S. Treasuries, despite the fact that Standard & Poor’s had just downgraded the U.S. debt rating late Friday.

Bank of America led the market’s precipitous decline on Monday, falling 20 percent to $6.41 per share, on news that AIG was suing the bank for the insurance company’s financial problems.

The Dow Jones Industrial Average fell 5.6 percent Monday to 10,810, following last week’s biggest weekly drop since 2008, then surged in early trading Tuesday as bargain hunters came calling.

The Keefe Bruyette & Woods Bank Stock Index, which consists mostly of large-cap banks, fell 10.7 percent Monday and then recovered somewhat by gaining 7 percent the next day.

The stock market pundits had been talking about what little impact the S&P downgrade would have, and investors reacted by abandoning stocks instead.

Analysts at KBW say what’s really happening is investors are worried about the economy, not the downgrade, and that doesn’t bode well for financial stocks.

But ironically, there was no new news about the economy to warrant such a free fall, only news about the debt rating.

Perhaps investors are beginning to believe the recovery will be slow to nonexistent for a long time and it took until late summer for that to sink in. There’s also the fact that many of them have the equivalent of “panic button” orders to sell when stocks fall below a certain point.

Bank stocks often take the biggest hit when the economy falters. High unemployment and low consumer confidence means fewer loans for everything from homes to shopping centers. Plus, many of the largest banks in the country have a lot of earnings exposure to the world’s stock markets, in the form of investment banking and trading revenues.

And as banks cut back on expenses because revenue is tight, so will they cut back on employment, as evidenced by a Bloomberg News breakdown of where all the job losses will be in banking.

Scott Brown, chief economist at Raymond James & Associates, said in his weekly commentary that: “Many commercial banks, for example, have large holdings of Fannie Mae and Freddie Mac debt. These banks may, in turn, move to boost capital and reduce lending to consumers and businesses,” as a result of the debt downgrade.

Predictably, investors are being told not to panic, just at a time when it seems like everyone is panicking.

Even analysts at S&P, whose downgrade was surrounded by so much tumult, said they thought stocks have been “oversold,” and that the U.S. will likely avoid another recession, according to Forbes.

Jerry Webman, chief economist at Oppenheimer Funds in New York, told ABC News: “The most important thing for people to do right now is to take a deep breath, whether you’re reacting to the latest, pretty good job numbers or you’re still in shell shock from everything else we’ve learned in the last week.”

Sigh.