The S&P 500 was up 3.5% in March. This may come as a surprise, given that two major banks went under and another is in the process of winding down its operations. However, the S&P 500 was resilient, as the damage was largely contained to the banking industry. But bank stocks took a major hit -- some deserved it -- while others were just caught up in the sell-off.

It should come as no surprise, then, that the three worst-performing stocks on the S&P 500 in March were all banks. Let's take a look at the big losers and see if they are worth a closer look as a possible investment or should be avoided.

Banks had the worst month

The three worst-performing stocks on the S&P 500 in March were First Republic Bank (FRCB), Zions Bancorp (ZION 1.19%), and Comerica (CMA -0.15%). First Republic was down a whopping 88.6% in March, while Zions was down 38.2%, and Comerica fell 36.7% for the month.

These three banks all have a few things in common. For one, all three are regional banks. Small and regional banks took the biggest hits in the bank sell-off after Signature Bank and SVB Financial's Silicon Valley Bank (SVB) collapsed after a run on deposits. The second reason is more germane to why these three banks, in particular, saw their stock prices tumble: They all have a large number of uninsured deposits.

Both SVB and Signature Bank had the highest level of uninsured deposits, by far, with more than 90% of total deposits uninsured. But among regional banks, First Republic was third, at about 68%, while Comerica was not far behind at 64%, and Zions was in the top 10 among regional banks with 52% in uninsured deposits.

What are uninsured deposits and why does this matter? Uninsured deposits refer to any cash in accounts in excess of $250,000. Since the Federal Deposit Insurance Corp. (FDIC) only insures deposits up to $250,000, money over that amount would be uninsured. As account holders pulled their deposits from SVB and then Signature, the contagion spread to other, similar banks that had high levels of uninsured deposits -- most notably First Republic.

However, it's worth noting that the run that hurt SVB was unique in that SVB had too much money invested in long-term held-to-maturity (HTM) bonds that it couldn't sell, thus hurting its liquidity after deposit outflows. First Republic, Zions, and Comerica didn't have nearly as much tied up in HTM bonds, as this article by the Motley Fool's Bram Berkowitz explains. That still didn't stop panicked investors from pulling deposits, at least initially.  

The banking crisis got national attention starting around March 8-9. By March 13, federal regulators stepped in to ensure that any banks that needed liquidity would get it through their Bank Term Funding Program, to avoid another bank failure. On March 16, the 11 largest U.S. banks committed to providing a lifeline to First Republic in the form of $30 billion in deposits to bolster its liquidity and assure other First Republic depositors that it had cash on hand to handle transactions.

Is the worst over?

First Republic, Zions, and Comerica have stabilized since that initial drop following the bank failures. But the massive drops in their stock prices brought their valuations down to dirt cheap levels.

Comerica is trading at 4.8 times earnings, down from a price-to-earnings (P/E) ratio of 8.8 at the end of 2022, while Zions is trading at 4.7 times earnings, down from 9.2 on Dec. 31. First Republic is even cheaper, with a P/E ratio of just 1.7, down from 14.5 at the end of 2022.

The worst is probably over for these bank stocks, but there's still too much volatility and uncertainty surrounding regional banks, as there's been a flight by depositors to larger, more regulated banks. Also, Congress is debating whether or not there should be further regulations on small to mid-sized banks -- those with less than $250 billion in assets that aren't subject to stress tests. This is something to watch for.

In addition, these are not banks I would have recommended before the meltdown, just because there are better deals elsewhere in the industry. That hasn't changed now.

But these three stocks are very cheap, so the low valuation is intriguing. I'd at least wait until they each report first-quarter earnings later this month, however, to see what kind of fallout is still to be reported for each and better determine if they are really on the road to recovery.