In Year of Crash, These Bank Stocks Soared

When it comes to banking shares, smaller is better.

First Financial Bankshares(FFIN Quote), Tompkins Financial(TMP Quote), NBT Bancorp(NBTB Quote), SY Bancorp(SYBT Quote) and Arrow Financial(AROW Quote) have outperformed larger financial companies such as Goldman Sachs(GS Quote) and BlackRock(BLK Quote).

First Financial, which carries a "buy" recommendation from TheStreet.com Ratings, is a top performer, based not only on stock performance but also on fundamentals. Focusing on the regional market in Texas, the bank has carved out a profitable niche. Although third-quarter revenue declined 5.57%, the company managed to boost earnings per share by 8.5%, outperforming the industry average and the S&P 500. Gross margins widened to 81.39% from 71.97% a year earlier, and operating margins stretched to 46.06% from 40.71%.

Regional, national and international banks have reported massive losses as a result of exposure to subprime mortgages. First Financial, which has a market value of about $1 billion, has avoided common pitfalls by staying true to the fundamentals of sound lending, maintaining regional focus and providing outstanding customer service.

Investors have recognized the bank's potential, fueling a one-year price appreciation of 34.6%. Consequently, the stock is trading at a premium to its industry peers based on price to earnings, price to book and price to sales. However, the stock is below its 52-week high of $67.

Other regional banks demonstrated a similar resistance to the pessimism that plagued financial stocks in 2008. The aforementioned stocks aren't cheap on an absolute basis, but there may be upside potential for people looking to play a trodden sector.

Small Banks, Big Returns Company Ticker MCap (millions) Grade Rating Price P/B P/S ROE Div. Yield 1-Year TOMPKINS FINANCIAL TMP 526 A Buy 52.5 2.5x 2.8x 14.1 2.59 39.76% FIRST FIN'L BANKSHARES FFIN 1013.1 A- Buy 49.36 2.9x 4.7x 15 2.68 34.64% NBT BANCORP NBTB 823.1 A- Buy 26.12 2.0x 2.3x 12.5 2.93 31.81% SY BANCORP SYBT 334.8 B Buy 24.7 2.4x 2.8x 16.4 2.6 9.00% ARROW FINANCIAL AROW 256.1 B Buy 24.66 2.0x 2.4x 15.9 4.14 16.60%

There are numerous risks facing small-cap financials. Many have a high institutionally owned percentage and thin trading volume. Also, while large banks have sustained heavy losses from subprime-related investments, most have survived and will live to fight another day. However, these regional players are susceptible to immediate bankruptcy if bets turn against them. Rescuing small-cap financials doesn't top the list of Treasury priorities.