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Avoid the Big Banks and Try These 5 Regional Banks Instead

There's decent value to be found in small banks

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The banking sector has been getting absolutely crushed during the current market correction. The contagion in Europe has spread to the United States and investors are selling first and asking questions later. The biggest loser in the U.S. is Bank of America (NYSE:BAC).

Since the market close on July 22, Bank of America stock is down almost 40% including a drop of 4% on Tuesday — an up day for the market. The company claims that all is well, but investors are not buying it. The residual issues from its disastrous excursion to mortgage market hell may yet prove fatal for the company.

While Bank of America’s future looks bleak, I’m not so sure you can paint the entire industry with the same brush. Specifically, local economies appear to be on the mend. And over the last two years, banks in general have benefited from an accommodating Federal Reserve.

This environment has allowed banks to rebuild balance sheets practically risk free. To the extent there is selling across the board, an opportunity might exist to do some selective buying. My preference would be to focus on local, regional banks. Large banks still are a mess, but these five regional banks look attractive at current prices.

Zions Bancorporation

A western regional bank, Zions Bancorporation (NASDAQ:ZION) operates in many of the troubled real estate markets, including Arizona, Nevada and California. Its shares are down 33% since July 22. Shockingly, that selling comes on the heals of a June quarter that saw the bank besting analyst estimates for profits by a whopping 18 cents per share.

Wall Street expects Zions to make 81 cents per share in the current year, and in 2012 it is expected to increase by more than 100% to $1.81 per share. Those profits have more to do with Federal Reserve policy than economic activity in its territory. Investors can buy Zions today for just 19 times current-year earnings and a very low 0.6 times book value.

Washington Federal

Another regional bank covering the west is Washington Federal (NASDAQ:WFSL). This savings and loan institution is faring much better than the rest of the banking sector, but its shares still are down 18% since July 22. Like Zions, Washington Federal posted strong results for the second quarter. The company made a profit of 27 cents per share, three cents per share better than average Wall Street estimates.

For the full year ending Sept. 30, 2011, analysts expect Washington Federal to make $1.01 per share. That number grows by 35% in the next year, to $1.36. At current prices, shares of Washington Federal trade for just 14 times current-year estimated earnings and 0.83 times book value. Historically, owning bank stocks trading for less than book value has been a profitable strategy.

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