Jon Bruss didn't want to talk about bank stocks two or three months ago.

He told a Journal Sentinel reporter to call back in the fall.

That changed on July 15.

"I'm on the cusp of saying I believe that July 15 was the day that financial stocks capitulated," said Bruss, managing principal, chief executive officer and portfolio manager at Fortress Partners Capital Management Ltd., Hartland.

The Nasdaq Bank Index has gained about 28% since that day, moving up out of a trough that had been in the making for more than a year.

Capitulation -- when investors throw up their hands and give up on stocks -- happened for several reasons on July 15, says Tom Brown of Bankstocks.com and Second Curve Capital. They include the regulators' shutdown of IndyMac Bancorp., General Motors' dividend suspension, lower-than-expected retail sales in June, the dollar's record low against the euro, and other events, Brown said in his newsletter.

After capitulation, the only thing to do is figure out when to get back in. Consequently, Bruss says it's time to start taking cash off the sidelines and putting it into bank stocks.

"It's important right now to be invested and to be investing," he said.

Bruss says he aims to be in the banks that are best-positioned to do well as this sector begins to perform better. There are three relatively small banks with assets of $900 million to $1.3 billion that Bruss says have caught his eye.

He says he's ready to buy:

Peoples Financial Corp., (PFBX, $22.51), Biloxi, Miss., offers loan, deposit, trust and other services to individuals and small and midsized businesses through 16 branches along the Mississippi Gulf Coast. Its stock has traded as high as $25.49 and as low as $18 in the last 52 weeks.

Despite Hurricane Katrina, Bruss says Peoples has managed to maintain "absolutely pristine" credit quality -- no easy feat in an environment in which subprime lending debacles and defaults are ruining many well-known financial institutions.

He says he's poised to buy Peoples shares because of that and the good job that management has done in maintaining high net interest margins, which generally represent the difference between the rate a bank earns on its loans and other assets and the interest it pays on deposits and other liabilities.

Mississippi Gov. Haley Barbour, a veteran Washington lobbyist, has done a good job of deploying federal disaster funds, and Peoples has moved some of its cash out of securities to fund loans, Bruss said.

Bruss already owns the two other banks:

Pulaski Financial Corp. (PULB, $10.43), St. Louis, is a thrift that's morphing itself into a commercial bank. It operates in St. Louis County, and its stock has traded as high as $16.90 and as low as $7.57 in the last 52 weeks.

Pulaski, which has positioned itself as St. Louis' hometown bank, has for the last few quarters turned in high single-digit and low double-digit earnings increases. It has a board that reads like a who's who of the local business community, and a meticulous chief financial officer who is in total command of the financials, Bruss said.

Pulaski has a large mortgage origination business in St. Louis and in Kansas City, Mo., that is rapidly increasing market share and providing a strong source of fee revenue, Bruss said.

The other part of Pulaski's business is focused on commercial and industrial lending.

The bank has done a number of successful "lift-outs" of teams of experienced lenders from local banks purchased by outsiders such as National City Corp. and Marshall & Ilsley Corp., he said.

Pulaski's shares have jumped considerably in recent weeks. They could go a little further, to $13 in the next 12 months, Bruss said.

Bank of Marin Bancorp (BMRC, $29.55), Corte Madera, Calif., serves the borrowing and deposit needs of businesses and individuals, and provides investment advisory and trust services.

Bank of Marin has reported five consecutive quarters of healthy earnings growth and has a balance sheet that's about as "squeaky clean" as they come, Bruss says. Its stock has traded as high as $33.25 and as low as $24 in the last 52 weeks.

The bank has steered clear of the kind of real estate development loans that plague so many of its competitors.

There are virtually no real estate development opportunities left in Marin County, but the bank's managers stayed away from those in nearby counties and focused on commercial and industrial lending instead, Bruss said.

Bank of Marin's focus on core deposits and its ability, like many California banks, to keep relatively more customer assets in non- interest bearing checking accounts, have helped the bank achieve what Bruss says are stratospheric net interest margins of 5.52%.

Meanwhile, just 0.03% of all the bank's loans are non- performing, he said.

Bank of Marin's shares are pricier than those of most banks, trading at about 160% to 170% of book value, Bruss said.

"But they've got great performance and a loyal following -- everyone on Wall Street who writes about this bank, they can't find anything wrong with it," Bruss said.

The biggest risk he associates with investing in any smaller bank right now is that their share prices, although not their profits, could suffer if there are more announcements of problems at big banks, he said.

Bank of Marin's shares could go as high as $35 in the next 12 months, while allowing investors to "sleep well," Bruss said.

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