Little Banks Showing Big Promise

By Sham Gad | April 13, 2010 AAA

If there continues to be an unintended consequence of the financial crisis it is that financial institutions continue to be viewed with disdain. No one will deny that some financial institutions have engaged in questionable practices over the past few years, but the nature of capitalism is that disruption must occur from time to time. In fact, looking over the past decades, there are also plenty of non-financial businesses that have created turmoil in the markets.

So, before you start slamming the banks, consider the following: Banking is as vital to U.S. and global prosperity as its ever been, and extending credit to consumers is an essential part of economic growth. While this credit extension was recently abused by both lenders and borrower, lending still has an important place in the economy. When done prudently and for the right reasons both lender and borrower benefit tremendously. Plus, not all banks have been behaving badly. Let's take a look at a few of the best small banks right now. (For more, see The History Of Consumer Credit Rights.)

Small Banks, Big Potential
Metro Bank (Nasdaq:METR) is a regional bank operating in Pennsylvania. Shares trade at 0.94 times book value and, over the past couple of years, the bank stuck to business as usual. Pennsylvania is a state not widely associated with a major real estate meltdown, and small regional banks' steadfast lending policies have been partly credited for this. Recently, Metro abandoned its bid to acquire rival Republic First Bancorp (Nasdaq:FRBK) after running into regulatory hurdles, but I don't expect this company's merger appetite to go away anytime soon.

Old National Bancorp (NYSE:ONB) also operates in the less glamorous states of Illinois, Indiana and Kentucky. But in banking, boring is a very good thing. To be sure, Old National wasn't immune to taking a larger provision of loan losses, but when national unemployment is at 10%, even the best of loans will go bad. This bank has been around since 1834, and has survived the country's worst financial panics. It's on its way through this one as well.

Turning Money Into More Money
Before investing in any bank, always dig deep into the financials but keep in mind that there's a reason why Warren Buffett didn't flinch when his investments in names like Wells Fargo (NYSE:WFC) and other financial institutions experienced share price declines of 80% or more. If a bank's management stays the course and doesn't let an easy lending environment get in the way of sound lending practices, that institution will find ample opportunity to grow in good and bad times. (For more, see The Evolution Of Banking.)

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