Pavlic

But if the employment picture and overall economic factors continue improving, banks could return to more normal conditions sooner than many expect - perhaps as early as 2012, Pavlic said.

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The biggest risk Pavlic sees for bank stocks is the possibility something might derail the recovery or create a double dip recession.

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So Pavlic began looking for banks with big mortgage exposure that beefed up their loan loss allowances in 2009.

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They've improved for eight consecutive months, and while they still aren't rising year-over-year, they're falling at a steadily slower rate, Pavlic said.

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One risk here is that the same management that got Citigroup into the soup is still running it, Pavlic said.

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"The trends that have driven banks to the brink have been in place for three to four years, and now those trends are beginning to show signs of reversing," said Pavlic, president of

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Bank of America Corp. (BAC, $17.83) is the financial stock Pavlic has already bought for client accounts.

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If conditions return to normal and the company gets back to a more typical 1.5% of loan loss allowances, that would free up another $2.60 a share of earnings, Pavlic said.

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The company has $505 billion of residential mortgage exposure and $38.6 billion, or 4.1%, in loan loss reserves, Pavlic said.

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New construction remains steady at about 400,000 units a year, and the inventory of new, unsold homes is down to 6.7 months, its lowest level since December 2006, Pavlic said.

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