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.
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.
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.
Commerce Bancshares (NASDAQ:CBSH), headquartered in Kansas City, Missouri, operates in the Midwest, with branches in Kansas, Illinois and Missouri. At a market capitalization of more than $3 billion, this regional bank is of a size that might attract the attention of a larger player. Shares have held up very well during the recent selloff. Commerce is down only 15% since July 22.
Smaller publicly traded companies are getting crushed in this market. How, then, do we explain National Bankshares’ (NASDAQ:NKSH) relatively small loss of 7% in value, at $168 million market cap? With only 13,000 shares trading hands on average per day, one would think this stock would collapse given the thin trading.
Perhaps investors are attracted to the 4% dividend. Or maybe they are attracted to the profitability of the bank. In the current year, Wall Street has the company generating a profit of $2.41 per share. There isn’t much growth coming given the expectation of a similar profit — $2.46 per share — in the following year. At current prices, National Bankshares trades for just 10 times current-year estimated earnings and a slight premium of 1.2 times book value.
National Bankshares operates in the mid-Atlantic region of the country. Given its small size, it is possible that a larger fish might bite on this small but profitable bank. When the market calms down, that would be my expectation. Investors can buy today and get paid to wait. I would do just that.
Tompkins Financial Corporation
Tompkins Financial Corporation (NYSE:TMP) is a New York-based bank that operates exclusively in the Empire State. Reflecting the wealth and resources of the New York market, the company has a market capitalization of nearly $500 million, but only 20,000 shares trade hands on a daily basis. Despite that thin margin, the stock is down only 5% since July 22.
That performance is significantly better than the larger banks in this country. Tompkins Financial pays a dividend of nearly 4% and profits are growing nicely. In the last three quarters the company has exceeded profit estimates by a wide margin. For the full year, Wall Street sees Tompkins’ profits at $3.30 per share, and growing 6% in the following year to $3.50 per share.
No sign of collapse here. Investors can buy shares of Tompkins today at a price of just 11.5 times current-year estimated earnings. With the Federal Reserve committed to a low interest rate policy until 2013, investors can hold Tompkins without the likelihood of getting hurt. The nearly 4% dividend means you will get paid while holding shares too. I would buy this stock at these prices.