Investors breathed a sigh of relief yesterday as the inflation moderated for the second consecutive month in November. This seems to be a clear sign that the Federal Reserve’s ultra-aggressive monetary policy stance is working.

Per the Bureau of Labor Statistics data, November’s consumer price index (CPI) rose 7.1%, marking the lowest CPI reading since December 2021. In October 2022, CPI was 7.7%, while the September reading stood at 8.2%. The central bank raised the interest rates by 75 basis points (bps) in each of the last four FOMC meetings, with the Fed Funds rates currently standing at 3.75%. With the inflation coming down gradually, the Fed will now likely slower the pace of the rate hike.

In the rising interest rate regime, banks are the biggest beneficiaries. This, along with economic growth, is ideal for banks to thrive. Though the near-term macroeconomic environment is expected to deteriorate, higher rates will keep supporting banks’ top-line growth. Thus, investors must invest in fundamentally solid bank stocks — TriCo Bancshares (TCBK Quick QuoteTCBK - Free Report) , NBT Bancorp Inc. (NBTB Quick QuoteNBTB - Free Report) and United Bankshares, Inc. (UBSI Quick QuoteUBSI - Free Report) — that are expected to tide over the near-term headwinds.

Before we discuss these three banks in detail, let’s recap this year’s operating backdrop for banks and where they stand heading into 2023.

Coming out of the two years of COVID-led mayhem and ambiguity, 2022 started on a grim note, as inflation turned out to be more “sticky” than expected. The inflation touched a 40-year-high, forcing the central bank to take unprecedented measures to tackle the same. While higher interest rates are beneficial to banks, other macroeconomic and geopolitical headwinds made the overall operating environment challenging for the banking industry.

Amid rising interest rates and robust loan demand (as the economy opened further following two years of uncertainty), banks reported robust improvements in net interest income (NII). Then again, as concerns continued to worsen, fee income growth became tough. This, along with higher provisions for credit losses, lowered banks’ profits to some extent.

Now, heading into 2023, the banking industry is likely to face more challenges. There is little chance of fee income witnessing a resounding rebound and, as the Fed starts to reduce rate hikes and the economy slows down, the support that banks received from NII is expected to diminish.

So, are bank stocks worth investing in? The answer is a resounding yes. But investors must be cautious while picking stocks from the industry. As it is daunting for investors to choose stocks from the vast banking universe, we have taken the help of the Zacks Stock Screener to select the above-mentioned three stocks.

These companies currently sport a Zacks Rank #1 (Strong Buy) or #2 (Buy). Also, they have a market capitalization of more than $1.5 billion and have rallied in excess of 10% so far this year.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Year-to-Date Price Performance

Image Source: Zacks Investment Research

Now, let’s discuss the three stocks in detail:

TriCo Bancshares, based in Chico, CA, provides a wide range of commercial banking services to retail customers and corporate clients through 71 bank branches and 89 ATMs. Over the years, TCBK has grown substantially through acquisitions. In March 2022, the company completed the acquisition of Valley Republic Bancorp, which further expanded its presence in Northern California and the San Joaquin Valley.

Driven by higher interest rates, robust loan growth, low deposit costs and earning asset mix shift, TriCo Bancshares continues to witness a solid rise in NII and net interest margin. Also, the company remains well-capitalized, which will support its financials even during the economic downturn.

In August, TCBK raised its quarterly dividend by 20% to 30 cents per share. The company has increased its dividend four times over the last five years, with an annual growth rate of 11.3%. Further, the company has a share repurchase plan in place. For the nine months ended Sep 30, 2022, it repurchased 0.6 million shares for $2.4 million. At the end of the third quarter, nearly 1.4 million shares remained available under the buyback authorization.

TCBK currently has a Zacks Rank of 2 and a market cap of $1.7 billion. The stock has rallied 18.7% so far this year. The company’s earnings are projected to witness a year-over-year rise of 1.5% this year. The same is expected to jump 15.9% for 2023.

NBT Bancorp, headquartered in Norwich, NY, provides a broad range of financial products and services to individuals, corporations and municipalities through more than 155 banking locations across New York, Pennsylvania, Vermont, Massachusetts and New Hampshire. Earlier this month, NBTB announced a merger deal with Salisbury Bancorp, Inc. , thus, foraying into Connecticut.

The merger is expected to provide additional scale and operating leverage, complement wealth advisory businesses, and result in higher fee-based income. Under the terms of the transaction, each share of Salisbury common stock will be converted into the right to receive 0.745 shares of NBTB common stock. The deal, expected to close by the second quarter of 2023, will be roughly 9.8% accretive to proforma GAAP earnings in the first full year after closure.

Higher interest rates, solid loan demand and efforts to improve fee income will continue to support NBT Bancorp going forward. In July, the company increased its quarterly dividend by 7.1% to 30 cents per share. The company raised its dividend five times in the last five years. It also has a share repurchase program in place. Till the third-quarter end of this year, the company repurchased 0.4 million shares, with 1.6 million remaining.

NBTB currently has a Zacks Rank of 2 and a market cap of $1.8 billion. The stock has gained 10.8% so far this year. The company’s earnings are projected to witness a year-over-year rise of 1% this year. The same is expected to increase 4.1% for 2023.

United Bankshares, based in Charleston, WV, provides commercial and retail banking products and services through approximately 250 offices across Virginia, Maryland, Washington, DC, North Carolina, South Carolina, Georgia, Pennsylvania, West Virginia and Ohio.

Higher interest rates, solid loan demand and a favorable earning asset mix will continue to support UBSI, going forward, while higher mortgage rates deter improvement in the mortgage banking business. Thus, the company expects a non-interest income of $27-$30 million, lower than the third quarter number of $32.7 million. Nonetheless, higher rates and mid to high-single-digit loan growth will aid the company’s NII, which is projected to be between $243 million and $248 million. In the third quarter, NII was $240.6 million.

United Bankshares pays regular dividends. The company raised its quarterly dividend by 2.9% to 36 cents per share in November 2021. Further, the company has a share repurchase plan in place. For the nine months ended Sep 30, 2022, it repurchased 2.3 million shares for $78.4 million. At the end of the third quarter, nearly 4.4 million shares remained available under the buyback authorization.

UBSI currently sports a Zacks Rank #1 and has a market cap of $5.4 billion. The stock has gained 11.2% so far this year. The company’s earnings are projected to witness year-over-year increases of 2% and 1.5% for 2022 and 2023, respectively.