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Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:

Strong Lenders With Weaker Shares by Lawrence C. Strauss

Summary: Worries about subprime fallout have kept regional bank stocks flat this year, vs. a 3.8% gain in the Russell 2000 Index. An inverted yield curve is squeezing banks' margins, and sluggish loan demand driven by wary buyers and stricter guidelines has hurt revenues. Fund manager David Ellison admits that the 'catalyst' to reverse their slide isn't there yet, but cautions that no one knows when it will arrive. He suggests buying banks with deep deposit bases, so that "you're not going to wake up one day and find out they can't fund themselves." He likes:

  • Cullen/Frost Bankers Inc. (CFR) -- a strong deposit base reduces its costs in lending to small/medium sized businesses. Its current $13.2 billion in assets includes $10.3 billion in deposits, and its customer-friendly policies keep its churn rate down. Morningstar analyst Jamie Peters calls its 4.65% net-interest margin [the difference between deposit and loan interest] "the envy of [its] peers." Fund manager Lisa Welch says shares (now $52) will hit $62 within the year.
  • Seacoast Banking Corp. of Florida (SBCF) -- despite Florida being hit hard by the real-estate slowdown, Seacost has kept its exposure to defaults way down through prudent loan-portfolio management. $2 billion of its $2.5 billion in assets are from deposits, and about half of its loans are commercial. Non-interest-bearing deposits (the most lucrative) now account for a full 20% of its base. Welch has shares (now $23.50) at $27 within the year.
Both institutions should benefit from their attractiveness to bigger banks. Takeover premiums may already be factored into the sector, but the potential should still offer shares protection against a big drop.

Related Links: Cullen Frost Bankers Poised for Mexico GrowthBeat Up Small Cap Bank Stocks Provide Trading Opportunities, But Tread LightlyBanks Are Today's Growth Stocks

Cullen Frost Bankers 21 05 2007 Chart Seacoast Banking 21 05 2007 Chart

Source: Two Deposit Rich Bankers You Can Bank On - Barron's