Stock Quotes in this Article: CBSH, NKSH, TMP, WFSL, ZION

MINNEAPOLIS (Stockpickr) -- Banking stocks have been lagging the market in 2011. Concerns about a double-dip recession, a second financial crisis triggered by defaulted debt in Europe, and residual issues from the weak housing market have investors in banks skittish.

The headline concerns are indeed frightening, and should they materialize, it could decimate the value of banks across the board. That said, there are strong factors helping to support the sector, including the Fed's easy money policy. The game plan is to make it as easy as possible for banks to make a profit.

The theory is that profits will stabilize balance sheets. Investors are not convinced. For example, Bank of America (BAC) is getting crushed in 2011. Shares are down about 23% this year and falling. The company continues to struggle with foreclosures, short sales, mortgage servicing and modifications stemming from its ill-fated acquisition of Countrywide Mortgage. The speculation by the bears is that BofA will need to beef up its balance sheet by offering more shares and in so doing will dilute current shareholder value.

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    It has been a veritable mess for sure, but I would not bet against banks. The Treasury and the Central Bank are powerful institutions that usually get their way. It may take time, but these banks will ultimately survive and thrive. Some of the best bargains in the banking sector come from the regional banking space.

    Here are five names to consider.

     

    Zions Bancorp

    Faring much better than Bank of America this year is Zions Bank (ZION). The Utah-based regional bank does not have nearly the bad loan exposure of BofA, and as a result its shares have held up relatively well in 2011. Year-to-date, Zion is down less than 5%.

    Helping support share price is Zion’s operating performance. In the latest quarter ended March 31, the company beat profit estimates by a solid 26 cents per share. Analysts had been forecasting a loss in the period, but the company managed to make 8 cents per share.

    For the full year, the average Wall Street estimate calls for Zion to make a profit of 45 cents per share. Reflecting the profit-making environment supported by the Federal Reserve, those profits jump nearly 300% to $1.78 per share next year. With shares trading for only 13 times 2012 estimates, Zion’s is a stock to own.

    Zions shows up on a recent list of 5 Bank Stocks Analysts Are Upgrading.

    Washington Federal

    The next regional bank to consider, Washington Federal (WFSL), operates in the Pacific Northwest and other areas of the West. Its shares are down a modest 3% so far this year despite incrementally growing profits over the last four quarters. A small miss of a penny per share against analyst estimates sent shares lower, but the stock has recovered nicely at the end of June and early July on hopes of a strong quarter.

    Community banks are typically valued based on some multiple of book value. During stable economic times, it was not uncommon for shares of a community bank to change hands at a price of 1.5 times book value or more. In the wake of the financial crisis, valuation metrics have changed. Today Washington Federal trades for 1 times book value.

    As for earnings, the average Wall Street estimate is for the company to make a profit of 97 cents per share for the year ending Sept. 30. In the following year, analysts have earnings growing by 35% to $1.31 per share. Those profits ultimately increase book value. For the stock to be valued at the same 1 times book value, share price must increase as profits are generated, making Washington Federal an intriguing buy today.

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    Commerce Bancshares

    Commerce Bancshares (CBSH), headquartered in Kansas City, operates in the Southwest. With a near-$4 billion market capitalization, this larger regional player may be ripe for an acquisition. Shares are not cheap, trading for 1.8 times book value, but the bank is profitable, and its some 400 branches may be attractive to one of the bigger national banks.

    Possibly reflecting the takeover potential of the stock, investors have bid up shares this year. Commerce is up a solid 8% in 2011, easily outperforming other banks and tracking closely with the performance of the overall market. I find the move higher in the stock a bit surprising, considering profit growth in 2011 is expected to slow to 12%. 2010 profits of $2.52 per share were 27% higher than in the year prior. For the current year, the average Wall Street estimate for earnings is $2.83 per share.

    Related: Top-Rated Regional Bank Stocks

    12% growth is nothing to sneeze at, but given the relatively steep valuation for the stock -- shares currently trade for 15 times 2011 estimated earnings -- one could expect a bit more. Even more worrisome would be that profit growth from 2011 to 2012 is expected to slow even further to 6%.

    Wall Street firm Morgan Keegan rates Commerce shares at outperform. I would prefer owning the stock at a lower price.

    National Bankshares

    They say that good things come in small packages. In the case of regional banks, they offer some of the best deals out there for investors. National Bankshares (NKSH) is a $174 million market cap bank operating in the Mid-Atlantic region. Its shares are very thinly traded, with an average of 11,000 shares trading hands on a daily basis over the last three months -- but they are worth the effort it takes to get your hands on them.

    National Bankshares is profitable, and its shares trade for just 1.28 times book value. In addition, the bank pays out a very healthy dividend of 3.9% to shareholders. The high yield on the stock is a direct result of shares' dropping by about 20% in value so far this year. At the same time, the bank continues to payout profits at a constant rate.

    Related: 20 Highest-Yielding Banking Stocks

    Earnings performance has been steady over the last year. National Bankshares has met or beaten analyst estimates in three of the last four quarters. In 2010 the bank made a record profit of $2.25 per share, representing an 8% increase over 2009 results. For 2011, profits are expected to grow 4% to $2.35 per share. Given that the economy is doing better than most believe, the estimate for 2011 is likely to be on the low side.

    The attraction here for investors is that strong dividend, a low price relative to book value and slow and steady profit growth. That’s not a bad combination in an uncertain market.

    Tompkins Financial

    Another high-paying dividend regional bank is Tompkins Financial (TMP). The New York banking concern has a market capitalization of $442 million and pays a dividend of 3.4%. Its shares recently moved into positive territory after being down most of the year. The stock is up 4% year-to-date.

    In addition to its strong dividend yield, Tompkins is growing profits at a double-digit rate. For 2010 the company made a profit of $3.11 per share, 13% better than the year prior. For 2011, profit growth is expected to be only 3% to $3.21 per share, but the estimate jumps 11% to $3.57 per share in 2012. Investors can buy that growth for just 13 times 2011 estimated earnings and 1.57 times book value.

    About the only negative with Tomkins is the lack of diversification. It operates in one state, New York. That narrow focus is not likely to attract any suitors. The stock is not likely to be a takeover candidate.

    That said, you can buy shares at a reasonable price and get paid a high dividend to hold the stock for that double-digit profit growth. Investors can’t ask for much more.

    To see these stocks in action, check out the 5 Regional Bank Stock Plays portfolio.

    -- Written by Jamie Dlugosch in Minneapolis.

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    At the time of publication, author had no positions in stocks mentioned.

    Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.