Three Regional Banks to Consider for the New Year

Buying bank stocks during periods of economic weakness has historically proven to be a winning strategy. Banks are one of the types of companies most leveraged to the economic cycle.

I purchased shares in Wells Fargo (WFC) during the worst of the downturn in early 2009 and that investment has risen sharply. In evaluating other investments in this sector I am drawn to the smaller regional banks. As a rule I prefer to select small to mid size companies since they are often more efficiently managed, can be more shareholder friendly and are covered by fewer analysts. There is a good chance that the banking industry will see consolidation coming out of this period and regionals could be takeover targets. Looking at the regionals I see three types of scenarios. There are a number where the stock price has fully recovered to pre-recession levels. Another group with poor quality fundamentals remains at very depressed prices. The third group has seen some partial recovery in price and is seeing improving underlying business conditions. I have selected three banks from this third group as having good prospects for price improvement without taking on excessive risk. All three pass my criteria for financial strength and capital base.

My first selection is Sterling Bancorp (STL). Sterling has operated in the New York Metro area for over 80 years. Sterling’s clientele includes many small and mid sized businesses that have suffered during the recession. But conditions for this group should improve as the economic recovery continues. The company did take TARP funds but expects to repay those in the next 12 months according to comments made during its latest earnings conference call. STL reported a loss in its most recent quarter due to management choice to accelerate the resolution on non-accrual loans primarily in the lease financing area. But management commented that “as a result, our non-accruals at the end of the 2010 third quarter were at the lowest point in three years, essentially returning to pre-recession levels.”