Banks finally worth buying, Adirondack managers say

* Small cap banks look appealing for first time since 2005

* Post-bankruptcy equities also attractive

* Fund weathered crisis with heavy weighting of technology

BOSTON, March 24 (Reuters) - The managers of the Adirondack Small Cap Fund (ADKSX.O) are finding value in bank stocks in 2011, a sector they had avoided until now.

Greg Roeder and Matthew Reiner kept the fund away from the worst excesses of the financial sector during the credit crisis. Now, they see improved credit quality and less competition in the sector.

"Until the last six months, we had not owned any banks since the fund opened in 2005," said Reiner, who is based near Albany, New York. "It's still pretty early, but we've started to dip our toe in the water."

The fund is looking for banks that benefited from the industry's consolidation caused by hundreds of small bank failures. He avoided giving specific picks.

Shares of small cap bank stocks, along with much of the stock market, have rebounded since the Federal Reserve last year announced plans to buy hundreds of billions of dollars of bonds. After falling some 27 percent from late April to the end of August, the First Trust Nasdaq ABA Community Banks Exchange-traded fund (QABA.P), which owns shares of 99 small banks, have since gained 21 percent.

"Lending standards have gotten much better," Reiner said. "Banks are going back to the way it used to be: lending money to people who don't need the money."

Avoiding banks helped the fund outperform most peers over the three years ended Dec. 31, 2010. The fund gained an average of 9.86 percent annually over that span even after losing 35 percent in 2008. Similar funds gained just 3.53 percent a year, according to Lipper data.

The $55 million Adirondack fund was the Lipper award winner in the small cap value category. The award recognizes consistent performance over three years adjusted for the amount of risk the fund took.

The Adirondack fund also used the credit crisis as an opportunity to buy into some other kinds of financial stocks that were previously too big to even qualify for the fund's small cap focus.

The fund bought and has since sold a position in Hartford Financial Services Group (HIG.N) but still owns a chunk of Genworth Financial (GNW.N), the insurer spun-off from General Electric (GE.N) in 2004.

Companies emerging from bankruptcy have caught Adirondack's attention, as well, Reiner said. Last year, for example, the fund piled into shares of theme park operator Six Flags Entertainment (SIX.N) in the low $40's. The fund recently sold as the shares approached $70.

Out of favor technology stocks remain a favorite. A heavy reliance on tech helped the fund weather the credit crisis better than many of its peers. Top holdings at the end of 2010 included circuit board maker DDi Corp DDIC.O and semiconductor equipment maker Verigy VRGY.O.

Reiner said the fund's focus is on overlooked companies that are not followed by brokerage firm analysts, often because they have strong balance sheets and generate plenty of cash on their own.

"They don't need to raise capital so Wall Street tends to ignore them," he said.

(Reporting by Aaron Pressman; Editing by Walden Siew)