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The financial sector has been getting beat up for years, ever since the sub-prime mortgage scandal, debt-crisis and recession caused by seemingly greedy large scale bankers. The big banks, like Bank of America (BAC), JP Morgan (JPM) and Citigroup (C) have been working hard to improve balance sheets but still have a long way to go. Their image is tarnished and customers are turning to other sources form their financial needs. Smaller, regional American banks have been able to step in and fill the gap left by the big banks. They are reporting increased deposit balances and deposit accounts, higher mortgage origination, profits and dividends. Banks like Fifth Third (FITB) and US Bancorp (USB) are leading the way. Banks with even smaller capitalization than these are doing well too.

The small banks are sheltered from the European debt crisis that the large, multinational banks have more exposure to. International slowing is affecting the banking sector harder than others. Small, regionally operated American banks are only exposed to our own economy and its projected 2.5% increase in GDP for 2012. Look for banks in the best performing parts of the country and you will find good investment returns.

Eagle Bancorp Inc (EGBN) is full service provider of commercial banking services. The company is headquartered in Bethesda, MD and operates less than a dozen offices in the Washington DC area. The bank is profitable and yields a dividend of $.22 annually, or about 1.3% at the current share price near $16.25. The small bank has been trending up sharply since bottoming in 2009, the stock price is approaching resistance but will probably not break out. Share price is trading near resistance and the short ratio at this time is very high. The most recent earnings report, released January 25th, 2012 and recapping full year 2011 told a story of a bank on the rise. Full earnings per share increased 50% over the previous year. The gains were made on increased loan production and deposits. Earnings are expected to grow another 30-40% in 2012. This company will continue to produce results in2012, a correction will be a good buying time and increase dividend yield. Current market cap is around $325 million.

Ladenburg Thalmann Financial Services Inc (LTS) is a retail and institutional securities brokerage and investment banking service. Revenue in 2011 was up about 19% by the third quarter, reducing the loss per share to just $.01, a decline from last years loss of $.06. The financial service earns revenue through three streams; investment banking, asset management and brokerage. Thalmann combines more steady but less lucrative brokerage services with more profitable but unpredictable investment banking. The combination will help the company stay afloat but any real gains will be hit or miss. The company is trying to boost shareholder value by repurchasing stock. The company is buying back an additional 5 million shares, bringing the total to 7.5 million over the course of the plan. Current capitalization is $384 million.

Safety Insurance Group Inc (SAFT) is a small insurance provider in Massachusetts. The company is profitable and pays a nice dividend as well. The rate is $2.00 per year, a yield of 4.5% at current share prices around $44. The 2011 results are coming in weak compared to the previous year but earnings were impacted by two major weather events. Hurricane Irene and a severe hail storm resulted in elevated loss claims. The claims paid in relation to the weather are direct cause of the decline. Loss-incurred expenses rose more than 25% in the third quarter alone but did not seriously affect future expectations. The financial standing of the business is still sound. Net and direct written premiums increased in the quarter and the year, which in the long run will offset the losses of 2011. The company is projecting an increase in earnings per share in 2012 around 180%. Safety Insurance, barring bad weather in 2012, will live up to its name. The balance sheet is sound, revenue is growing and investment returns are stable. With the dividend yield its hard to not like this one.

Flushing Financial Corp (FFIC) is also making profits and paying a substantial dividend. The savings and loan is the holding company of Flushing Savings and Loan, operating in New York State. The bank earned $1.15 last year and is expected to increase this to $1.24 in 2012. The stock has a lot of support around the $12-$12.50 and looks like it is going up. The company posted record revenue and earnings per share in 2011 on improved margins, increased loan origination and a decrease in delinquencies. The performance of the bank is further evidence of the underlying strength of the economy and the small banking sector. Flushing will continue to produce these good results in 2012 and make more gains on improved operations. Flushing Financial will easily trade near $20 by year end.

IberiaBank (IBKC) is a growing regional bank operating in Louisiana, Alabama and Mississippi. The bank acquired two other banking institutions in the middle part of 2011 and was able to beat Wall Street estimates for the year because of it. The bank earned $.69 per share in the fourth quarter versus estimates of $.65. The bank increased loan origination and deposit balances by 18% and 17% respectively. This explosive growth will continue in 2012. The US economy is speeding up from 2011′s 1.7% to an expected 2.5% in 2012. This growth will be seen in continued revenue growth and earnings. IberiBank is currently trading around $53, near the middle of its 5 year range. The stock is moving up and could break above $60 on news of sustained revenue growth. Current market cap is around $1.5 billion and the stock yields about 2.5%.

Source: 5 Small Cap Financial Services Stocks To Watch