In the months following the market bottom in March of last year, regional banks were favored by many to outperform their Wall Street counterparts. While this belief held true for most of the spring, the summer months marked a rally for not only the major banks but the overall market as well. Since their strong trading days initially following the crash, regionals have struggled to keep up with the big majors and the rest of the market as well. The KBW Regional Banking Index has returned 42% in the past year, trailing the overall S&P which has risen 53% over the same period. The new year however has brought about increased optimism for the regionals as the KBW Regional Index has outperformed the S&P 500 by roughly 12%.

That being said, here are four regional banks that could continue the industry's recent run and offer up a healthy dividend to shareholders as well.

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Below Book Value
FNB Corporation
(NYSE:FNB) is a Pennsylvania based financial and bank holding company which operates in the retail and commercial banking market, as well as leasing, wealth management and insurance. FNB suffered a big decline in its stock price (like every other bank) in the fall of 2008, but recovered well in the spring, however struggles with its balance sheet caused shares to once again struggle for the remainder of 2009. The new year has brought new optimism for FNB, however, as shares are up 17%, despite a fairly large miss in fourth quarter earnings in January. While FNB is still carrying a large debt load on its balance sheet, value investors might be intrigued to know that shares are currently trading at a price-to-book of only 0.87.

Busey Getting Busy
Another regional financial that has seen its stock rise higher this year is the First Busey Corporation (Nasdaq:BUSE). First Busey shares are up over 12% in 2010. The Illinois based firm is engaged in retail and commercial banking, along with wealth management and agricultural lending in several states in the midwest and Florida. First Busey offers shareholders a decent 3.8% dividend yield, but is more intriguing as a possible comeback story. The stock was pummeled for the past 18 months, reporting negative earnings for 2009. However, analysts are expecting only a $0.01 loss for this quarter and any sort of beat here could mark a turning point for the bank for future earnings.

The majority of Busey's troubles came as a result of its real-estate operations in Florida, which crippled the companies books. However, it appears that the bank has made it past the most difficult stretch, with Busey's President and CEO saying he expects no more "outsized provisions for loan losses." Having fallen so far so quickly, First Busey could be a sleeper pick for investors looking for a laggard with some pop potential.

Sterling Protection
Jumping from the midwest to the big apple, Sterling Bancorp (NYSE:STL) offers banking and financial services to customers in the New York metropolitan area. Sterling has rallied along with its regional counterparts thus far in 2010, up over 15% YTD, this following the same old story of huge losses in the share price over the past year and a half. Sterling has rebounded nicely in the past couple of quarters, however, with sizable beats on the earnings front and much improved financials as it appears that the bank is headed in the right direction.

Sterling also just announced that it was offering 7.5 million shares in a public offering priced at $8, a slight discount over the current stock price. While I'm sure many shareholders don't like the idea of having their shares further diluted, the proceeds from the offering will be a huge asset to the company's books and also qualifies as Tier 1 regulatory capital, which only helps solidifies the bank's standing. Making a call for Sterling is a difficult task to say the least, however with a dividend yield of 4.35% Sterling shares offer some protection to investors if the stock begins to retreat on them.

Aloha
We finish our regional bank search on the sunny shores of the Hawaiian island. The Bank of Hawaii Corp (NYSE:BOH) is a larger regional player than the other banks and provides investors with a more stable option with a comparable dividend (4% yield). Unlike many other regionals however, BOH has actually declined since the new year, down 6%.

The decline in stock price is directly attributable to BOH's fourth quarter earnings, which saw the bank fall dismally short of analyst expectations. Bank of Hawaii's CEO Allan Landon attributed the disappointing results to the bank repositioning its investment portfolio to reduce risk and thus seek out better rates. Although the stock suffered in the short-term as a result of the defensive investment strategy, I like the game plan going forward. BOH has had positive and improving earnings over the past year and has a good track record of generating earnings for its shareholders.

The Bottom Line
With regional banks struggling so mightily in the last half of 2009 and beginning to show strength in the early part of the new year, I am very optimistic about the potential of the industry as a whole. I have highlighted a few possible options above and would recommend the SPDR KBW Regional Banking ETF (NYSE: KRE) which tracks the KBW Regional Banking Index. This may end up being a perfect example of the laggards becoming the leaders in 2010. (To learn more, see The Industry Handbook: The Banking Industry.)

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Tickers in this Article: STL, FNB, BOH, BUSE, KRE

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