Big Love for Small Banks

 | Oct 18, 2011 | 10:30 AM EDT
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My wife wanted to put some stuff in storage, so I dropped by the local self-storage center to pick up packing materials. I paid with my Wachovia debit card, and the woman who processed the transaction remarked that she had heard Wachovia was now Wells Fargo (WFC). I said that the conversion had just been completed, and I mentioned that my wife was a branch manager for the bank. The woman said that she had once been a branch manager for a bank that ended up as a part of a bigger bank before she retired.

She walked me through her career. She had started at a small, one-branch bank in Wheaton, Ill., that was acquired by a slightly larger bank, which was acquired by First Chicago, which was acquired by Bank One, which was bought by Chase, which then became part of JPMorgan Chase (JPM), as it exists today.  Although she is sure that JPMorgan CEO Jamie Dimon is the best thing since sliced bread, she is of the opinion that small banks are best. She blames the current problems in the banking industry on regulation changes that allowed for interstate banking.

We talked about the culture at small banks, and why they work so much better than big banks. When a customer walked in, the bank officers often knew him or her, their family and history. They knew that even though John had once fallen behind on a couple of bills when his wife was sick, he would repay every dime you lent him. His credit score was not perfect, but he was a good risk. They also knew that Bill Jr.'s business had a pristine balance sheet and credit rating, but it was built by his recently deceased father and, in this case, the apple fell a great distance from the tree, so new loans to junior were not a great idea. The bank president knew that the parcel those out-of-towners wanted to develop contained several acres of wetlands, and that old Elmer was never going to sell the piece they needed to complete the parcel, anyway. It was a bad loan no matter how profitable it looked on paper.

I agree with my new friend, and until I married a then-Wachovia, now-Wells Fargo branch manager, I had never had an account at a larger bank. I always banked with hometown banks where they knew my name, my account number and how many shares of the stock I owned. They knew how I liked my coffee and what denominations of bills I preferred when I cashed a check. On the rare occasion that I needed a loan, it was not some lengthy drawn-out process. It was a handshake and a signature.

This preference spills over to my investing bank stocks. I am sure that when I buy shares of Fox Chase Bancorp (FXCB) I do not have to worry about how much of a haircut they have to take on their Greek debt holdings. The folks at Home Bancorp (HBCP) of Lafayette, La., spend more time worrying about making smart acquisitions at great prices and growing their local deposit base than they do about the next G7 meeting. As more of the customer base is disgusted by big banks and their new fees, there's a real opportunity for small banks to grow their deposit bases and profits over the next few years. In addition, the type of acquisition activity that my new friend experienced is going to be seen again over the next decade, brining large profits to current shareholders of smaller banks.

Big banks make good trading vehicles in this market, but small banks represent the trade of the decade. If you do not know every small publicly traded bank in your area, you should. Becoming a stockholder in these small  financial institutions could make you an enormous amount of money.

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