Regional Banks to Bank On

For investors, "bank" has become a four-letter word, rife with weekly blowups from hefty home equity losses, residential construction loans gone bad, and market fears that the worst is yet to come.

Last week's volatility hit fever-pitch proportions as the music suddenly stopped for IndyMac shareholders. The Fed (as in FDIC) seized the bank after an old-fashioned run by desperate accountholders, which was triggered by IndyMac's unwise focus on Alt-A mortgages during the height of the real estate bubble.

The financial system is showing undeniable signs of cracking, but as with most bubbles, the subsequent (and inevitable) burst shows which firms had been swimming naked when the tide went out. On the flip side, those with the foresight to maintain their wits and keep their shorts on can usually capitalize on the situation by either growing or consolidating market share. Here are three regional banks successfully navigating the current industry turmoil.

Prudent PNC Financial Services
Last week, Pittsburgh-based PNC Financial (NYSE: PNC  ) posted a 19% increase in earnings, topping analyst expectations on the back of corporate lending strength and growth in net interest income. Staying close to home has helped PNC, as regional rivals such as National City (NYSE: NCC  ) scurried to Florida and other states now being hard-hit by subprime mortgage losses. Management also shrewdly hired away certain risk managers from JPMorgan Chase (NYSE: JPM  ) , which has proved to be one of the best-performing money center banks, similarly avoiding the worst product areas of the credit crisis.

Mighty M&T
Simply citing Warren Buffett as a past shareholder in Buffalo-based M&T Bank (NYSE: MTB  ) should demonstrate management's conservative bias. Though its own second-quarter results last week indicated that it's feeling some stress from higher credit costs, M&T managed to stay firmly profitable, thanks to strong loan and deposit growth and overall expense controls. I recently met a former head of M&T's trust department, who cited management's no-nonsense approach to running its operations. M&T also has a proven track record of growth in its core Northeastern market, relying on bolt-on acquisitions to enhance its market share.

Bank on BB&T
Winston-Salem-based BB&T (NYSE: BBT  ) recently bucked the dividend-cut trend by announcing an increase to its quarterly coupon. Its second-quarter results were hurt by a rise in non-performing assets, but they still managed to beat analyst projections. The current market environment has caused management to reign in its healthy appetite for acquisitions, but BB&T's stellar credit quality should help it weather the storm. A keen focus on expenses could also allow the bank to exploit the current predicament of cross-state rival Wachovia (NYSE: WB  ) . Wachovia got caught with its trunks down in California following its acquisition of Golden West Financial, which has turned out to be anything but a golden opportunity.

Fools, take note: Regional-bank investing requires a strong stomach. Even the savviest operator is subject to the whims of local trends, since these banks have smaller deposit bases and less geographic diversity than banking behemoths such as Bank of America (NYSE: BAC  ) . But for now, the above players have proved they can withstand further hits to their balance sheets, should the credit cycle head further south before stabilizing. With that, I fully expect investors to sleep well at night, armed with a prudent approach to taking advantage of a fearful Mr. Market.

BB&T, JPMorgan Chase, and Bank of America are Motley Fool Income Investor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.

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