Major Bargains In Modest Banks

Thanks to low interest rates and a growing perception that the worst of the real estate loan crisis is over, bank stocks are fairly pricey these days. So it's hardly surprising that some investors have begun prospecting for value in the little-known and thinly traded world of small-cap bank stocks.

Banks that fall into this category have assets of roughly $4 billion or less. Better-known regionals start at about $20 billion. Small-cap banks are generally ignored by Wall Street analysts because institutional investors cannot acquire enough shares. So what little research exists is usually done by smaller regional brokerages.

The dearth of information on these stocks makes them somewhat risky. But a lot of hidden bargains are lurking among little banks. And don't forget possible takeover plays as the industry continues to consolidate.

What's more, many small banks have solid local franchises. And by concentrating on their own communities, many avoided far-flung and reckless real estate lending.

Mid Am is a favorite of analyst Henry Dickson of Chicago-based Kemper Securities Group. Headquartered in Bowling Green, Ohio, Mid Am, with $1.2 billion in assets, is the biggest independent bank in northwest Ohio. After earning 92 a share in 1991, Dickson expects profits to more than double this year, to $2.10 a share. Moreover, Mid Am is selling at 9.6 times 1992 profit estimates. The 150-bank index of Keefe, Bruyette & Woods has a price-earnings ratio of just over 11.

Somewhat pricier, but no less promising, is Valley Bancorporation in Appleton, Wis. Valley, with $3.8 billion in assets, has an extensive branch network. Its price-earnings ratio is currently 10.3. But Dickson expects earnings to grow by 20% this year, to $3 a share. He also sees Valley as a potential takeover target.

Another possible merger play is Cullen/Frost Bankers in San Antonio, according to analyst Mark Lynch of Bear Stearns. After ailing First City Bancorporation of Texas is acquired this year as expected, Cullen/Frost will be the only independent bank of any size in the state. With assets of $3.3 billion, that's not saying a lot. But to investors, the value of a small bank isn't size, it's ultimate share price.