Regional Banks: It's All About Credit

How will we know when we've hit the bottom in bank stocks?

When the rate of increase of nonperforming assets begins to slow. Right now we have a 17% increase from quarter to quarter. When that slows to 10%, that's a very good sign. That can happen two ways -- if housing prices stabilize and things start to get better in the real estate market, or if the banks start to sell loans off the balance sheet.

What is your top pick?

First Horizon. It's got one of the strongest capital [levels] ... of any of its peer group. It's finally announced the sale of the mortgage company, which frees up another $400 million in capital and reduces the balance sheet exposure by about $5 billion to $6 billion over the next year. They're doing everything they said they were. I think it's a steal. Fifth Third also looks interesting here. I think the embedded value of the processing company is not showing up in the company's current valuation. I think Colonial also. Anybody who looks back a year from now will wish they bought this thing at $5 a share. It's not going to zero.