Goliaths of the banking world such as JPMorgan (NYSE: JPM ) and Goldman Sachs (NYSE: GS ) have been breaking through the financial crisis and are now leading the way by reporting an exceptional rebound from the depths of the crisis. Whether they post profits or incur losses, these big banks always remain in the public eye.
But from an investment standpoint, regional banks look even more attractive.
Regional banks are a lot more stable now. Quite a few of them have witnessed a significant decline in provisions for loan losses (PLLs), suggesting their managements believe the worst is behind them. According to the Federal Deposit Insurance Corp.'s fourth-quarter report for 2010, insured institutions reduced provisions to $31.6 billion from $62.9 billion a year earlier -- a sharp decline of almost 50%. This, in fact, is the lowest since the third quarter of 2007.
Credit quality is improving at the same time. Nonperforming assets fell for a third consecutive quarter while net charge-offs exceeded loss provisions by almost $10 billion.
Now that the dust has settled a bit, smaller banks are looking all the more appealing. Let's take a look at a few of them that have been showing resilience and look poised for growth in the long run.
Hudson City Bancorp (Nasdaq: HCBK ) is one of the few banks in the U.S. that did not need to resort to a government bailout. Although it posted a net loss in its first quarter, Hudson's performance showed significant improvement. While its PLL declined, its noninterest income more than tripled. Deposit and tier 1 leverage ratio went up while borrowings decreased. As I mentioned in a prior article, stated losses were due to balance sheet restructuring charges. But this overhaul will only strengthen Hudson's performance in the long run, as it will reduce its high interest on borrowings.
Improvement in its overall credit portfolio enabled KeyCorp (NYSE: KEY ) to beat analysts' estimates by reporting a first-quarter profit of $173 million. KeyCorp has been focusing on improving its credit quality, and its strategy to exit riskier lending categories allowed it to do precisely that. Nonperforming assets and loans and charge-offs also reduced significantly. To spur long-term growth, the bank is opening new branches to augment its community banking services.
Flagstar Bancorp (NYSE: FBC ) couldn't quite manage to pull off black ink during the first quarter. But it definitely showed some healthy signs. Credit costs and PLLs declined for the fourth straight quarter, resulting in an improvement in its net losses. Flagstar nonperforming assets declined on a year-on-year basis while its core deposits went up by 10%. The bank also sold $80.3 million of nonperforming residential first mortgage loans. This bank rounds out three of my favorite regional banks for Fools to take a look at.
The Foolish bottom line
Clearly, regional banks are still vulnerable. Their commercial and residential portfolios still make them susceptible to continued sluggishness on the housing front. Domestic loan growth also has been a disturbing trend in the first quarter and may adversely impact the lending business.
There's also another risk to consider. Should interest rates rise, borrowers with floating interest rates may default more, resulting in regional banks' profit margins narrowing. But for now, these banks have proved their potential to stay afloat. I'm impressed.
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