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TWST: Brad, give us a definition of a regional bank. You suggested last year that perhaps this classification is not altogether meaningful, given blurring lines in the banking business.

Mr. Vander Ploeg: I would say that continues to be the case. The lines are shifting between what might be called a regional bank, a super-regional bank, a money center bank, and a financial services company. There are still banks, though, that would best be considered “regional banks,” and investors think of them that way. So while the lines are blurring, there are still definitely companies that can correctly be classified as regional banks. The main characteristic of a regional bank is a retail footprint that is focused on a certain limited geography. Regional banks usually have assets of 3 billion or more, but can be large, as long as they’re focused on a particular geographic area. Furthermore, regional banks today engage in many more lines of business than they have in the past, including asset management, trust services, and brokerage and investment banking.

TWST: Brad, what are the banks that you have your eye on or you might suggest to investors that are going to pass the test when credit quality becomes the big issue?

Mr. Vander Ploeg:The other regional bank stock that I like at this point is Northern Trust Corporation (Nasdaq:NTRS), which is not a traditional bank but certainly one that fits the regional bank definition. There are several reasons we like the stock right now. Northern Trust has arguably done a better job than any bank in the country over the last 10 years of positioning itself to succeed. Management had the foresight and good fortune to be involved in businesses that took full advantage of the wealth creation effect of the 1990s. And now, the Northern Trust brand is one of the most highly thought of in the country. Demographic trends continue to favor Northern, creating a tremendous tailwind. But more importantly, Northern Trust is recognized as a premier provider of services within its chosen product lines. Many are concerned, ourselves included, that Northern Trust will have trouble maintaining its EPS growth in a negative stock market because of the sensitivity of its fee base to market performance. What the company has proven, however, is that it can make up for a sideways or down market through new business generation. Although expensive compared with other banks, the company has few direct peers, and should trade at a significant premium to the group. The stock is well off its high, and looks attractive to me as a long-term investment.

TWST: Brad, the last word. Is it a viable business? Do you have to be big to survive? What message would you hope investors would take away from this panel?

Mr. Vander Ploeg: My answers are yes and no. Yes, it’s a viable business. And no, you don’t have to be any particular size to survive or prosper. I think that a company, if properly focused, can succeed no matter what their size range is. Sometimes it helps to have critical mass in order to be able to absorb volatility. But by and large, if you’re running a viable business model, which I think a lot of the banks are today, then how big they are in terms of total assets really does not matter. It is a service-driven business and, as mentioned before, with everybody having similar products, what it really comes down to is how these companies can service their clients and whether that service is better than at the bank across the street. In terms of how to approach bank investing today, I think it is absolutely crucial to pick the highest quality companies. Given where we are in the credit cycle and the interest rate cycle, investors should shy away from the dicey ideas. With a number of companies in the space to choose from, investors can afford to be selective. At the risk of drawing some fire, I would say that on an industry-wide basis, traditional banking is not a growth business. The size of the overall market is not growing at a very impressive pace. However, within the market, certain companies are growing very rapidly by stealing market share from their less adept competitors. Clearly, these are the companies investors should own.