In the fourth quarter of 2008, FDIC-insured banks lost $32.1 billion–the industry’s first quarterly loss since 1990–and 252 institutions with $159 billion in assets appeared on the regulator’s “problem list.” And the list of failed banks continues to grow.

 These difficulties will only intensify. Banks are in the business of lending money, and the collateral and cash flows that ultimately secure loans have been under pressure for the past year and a half.

These weaknesses are creating real opportunities from a valuation perspective, and given the problems afflicting the mega-lenders, well-capitalized small, midsize and regional institutions are likely to drive the consolidation that accompanies any correction.

To the Bank

Headquartered in New Jersey, Hudson City Bancorp (NSDQ: HCBK) boasts more than 130 branches and just over $56 billion in assets. With a service area that includes the suburbs of Philadelphia and New York City, the thrift’s footprint includes some of the wealthiest counties in the nation.

Attractive demographics aside, Hudson City remained a paragon of solid banking practices at a time when other institutions took on excessive risks. And when other financial institutions curtailed lending and accepted billions of dollars in bailouts, Hudson City turned down the unneeded money but still boosted loan production to record levels.

Despite this uptick in lending, Hudson City’s risk profile hasn’t budged; management has adhered to conservative lending and investment policies through both boom and bust, concentrating on providing first mortgages to prime borrowers. And because the thrift holds every loan in portfolio, it had incentive to avoid risky subprime mortgages and negative-amortization products that dominate the headlines. Loan-to-value (LTV) ratios tended toward the lower end, and on the rare occasions that the bank underwrote high-LTV loans, borrowers were required to carry mortgage insurance.

We expect management to step up reserves in coming quarters in anticipation of further weakness, but see little reason to expect a huge spike in problem loans. The thrift serves a high net worth area where median incomes exceed the national average and unemployment, though ticking higher, remains at manageable levels.

Meanwhile, loan production volume remains robust. In the first quarter the thrift wrote $2.04 billion in loans, of which $1.32 billion were originated by the bank and $723.3 million were purchased, bringing its total net loans to $30.11 billion. A huge spike in refinancing activity along with reduced competition from brokers and other lenders drove that growth, and in a testament to the bank’s financial strength, the thrift financed these new loans through deposits. That self-funding helps keep costs down, and these savings flow straight to the bottom line.

Like Hudson City, IBERIABANK (NSDQ: IBKC) maintained its historical conservatism in the face of hysterical growth. And because the bank holding company didn’t rely on securitization to bolster fee income or wholesale funding, it has avoided the liquidity constraints affecting weaker players.

That forbearance has paid off. At a time when capital and liquidity are at a premium, Iberia maintains a Tier 1 capital ratio of 11.94 percent. Nonperforming assets were a manageable 0.95 percent of total assets at the end of the first quarter, while the percentage of loans 30 day or more overdue moderated compared to the previous quarter.

Further deterioration in credit quality is inevitable, but Iberia’s portfolios should weather the storm. Management’s longstanding focus on originating and selling conventional mortgages substantially reduces risk, and the commercial portfolio’s diversification and limited exposure to homebuilders likewise provides a degree of protection.

Operating in Louisiana and Arkansas has also paid off for the company. These markets didn’t experience eye-popping growth in home prices and therefore avoided the gut-wrenching fall. And the presence of mature oil and gas operations in Southern Louisiana, along with expanded activity in Arkansas’ Fayetteville Shale Play and Louisiana’s Haynesville Shale Play, help stabilize the economy.

Unemployment numbers in these two states, though climbing a bit, remain well below the national average. But Iberia’s most impressive asset remains the company’s proactive management team, which continues to address challenges in a transparent and proactive manner while taking advantage of attractive opportunities as they arise.

In the first quarter alone the company announced plans to expand into Mobile and Houston, poaching senior commercial bankers–along with their client relationships–from the struggling Regions Financial (NYSE: RF) and Whitney Holding Corp (NSDQ: RF).

And Iberia continues to build market share within its current footprint. Mounting losses from residential construction loans and exposure to the Florida Panhandle have put Whitney Holding Corp on the defensive in its home turf of New Orleans; Iberia has not only leveraged its relative strength to attract top talent from its ailing rival, but the company also continues to add deposits and commercial customers at a rapid rate.

Finally, it’s impossible to discuss IBERIABANK Corp without mentioning its initial participation in TARP’s Capital Purchase Program and subsequent decision to repay the funds.

Iberia has repeatedly demonstrated its ability to raise private capital at a time when other institutions were suffering from severe shortfalls and liquidity constraints. The company issued $7 million in trust preferred securities in March and $25 million in subordinate debt in July. After accepting $90 million in TARP funds (the Treasury Dept offered $125 million), Iberia successfully raised $109 million 11 days later through a common stock offering.

Chaffing under the stigma and restrictions associated with accepting TARP funds, Iberia was the first bank to obtain regulatory approval to pay back this obligation and remains well positioned for future growth.

See the authors’ free report, Banks of Opportunity by clicking here.