Suddenly, it all seems quaint: Banks are sticking to taking deposits and making loans to creditworthy borrowers. But that s exactly what many of the nation s small and midsize banks did while their bigger brethren gorged on exotic securities and subprime loans. Guess which could make for the better stock investments.

Now that all banks are playing the same game, with tighter lending standards across the industry, well-run small and regional banks are more competitive with the big boys, says David Ellison, manager of the FBR Small Cap Financial fund (FBRSX). In fact, local banks may now be the only place for many small businesses to get financing, since the big banks have cut back so much.

Staying local seems to have benefited Provident Financial Services (PFS), a New Jersey thrift with 82 branches. Just 1.5 percent of its loans are nonperforming, below the industry average, says Mark Fitzgibbon, bank analyst with Sandler O Neill. A new CEO who s fanatical about cost cutting is slated to take over in September, he adds. The stock isn t as cheap as it was a few months ago, now trading at 1.3 times tangible book value in line with industry standards and it s rallied sharply in recent weeks. Fitzgibbon downgraded the stock to a hold rating in late July but says the bank is still well positioned to thrive.

Another bank with a solid local niche: City National (CYN). Based in Beverly Hills, Calif., the bank caters to the entertainment industry and a high-end Hollywood client base, with $28.4 billion in assets under management and deposits of $13.7 billion. The stock has fallen 19 percent this year on concerns about its exposure to California s hard-hit real estate market. But the bank has high-quality assets, says Charles Bobrinskoy, director of research for Ariel Investments, who says earnings should rise significantly, as lending picks up and write-offs for bad loans head down. Earnings are expected to plunge 90 percent this year, to 27 cents a share, but next year analysts foresee them hitting $1.36.

Even banks with sound balance sheets could be in for a few more rocky quarters. One such bank, TCF Financial (TCB), based in Wayzata, Minn., could still see a rising tide of problem assets, FBR s Ellison says. But it s also increasing deposits and has an adequate capital cushion, he adds, and is poised to pick up business as shakier Midwestern banks cut back on lending.

The repair work is ongoing, he says, and this is the time to invest and be patient.