Undoubtedly, you've heard Citigroup's (NYSE:C) good news... the bank only lost $2.5 billion last quarter. It was better than - or should I say, not as bad as - analysts expected, and some investors used it as a reason to keep the rally alive.

While I applaud the company's ability to only perform poorly rather than terribly, I have to also wonder if the apparent immunity to moderately bad news has blinded the market to worthy opportunities in banking.

There were actually a couple of dozen banks reporting earnings on Thursday. Citigroup was one of the three major, national banks with quarterly earnings to announce. The other twenty or so were smaller, regional banks. It would have taken a lot of data mining (which I did) to notice this, but there's a stark disparity between the results of large cap banks and their smaller brethren. Are we enamored by the wrong group?

Bigger Isn't Necessarily Better
It wasn't just Citigroup that turned in disappointing numbers. BB&T (NYSE:BBT) also fell short with its $428 million in earnings. Profitable, yes, but noticeably less than the $458 million it made in the same quarter one year earlier. Had it not been for one-time charge-offs for - do I even need to say it? - non-performing loans, the company would have posted income of $377 million. Wells Fargo (NYSE:WFC) also successfully played the "could have been worse" card, by not losing.

In all fairness, PNC Financial Services Group (NYSE:PNC) did turn in a nice increase in its bottom line from $423 million in 2007 to $505 million for the same three month period in 2007. They may be one of the few bright spots though, as most banks are still suffering from lingering loan write-offs.

In most cases, the write-offs for non-performing loans deemed "one time" charges seem to be recurring each quarter. It's just that a different group of loans is written-off. Wells Fargo is one of several banks that is specifically planning for more charge-offs in the future.

Rally For The Regionals
Perhaps their inability or unwillingness to get involved in subprime loan portfolios was ultimately a good thing for the smaller banks. Though some of these companies are involved with Alt-A and similar loans, most don't have much or any liability on that front. (For more on these higher risk loans, check out The Fuel That Fed The Subprime Meltdown.)

The result?
Take a look at July 17's posted earnings from last quarter for a large number of regional banks, compared to analysts' estimated earnings.

Company Estimated Quarterly EPS Actual Quarterly EPS Market Cap
AmericanRiver Bankshares
$0.34 $0.36 $56.3M
$0.41 $0.49 $1.67B
Berkshire Hills Bancorp
$0.55 $0.55 $258M
Brookline Bancorp
$0.07 $0.06 $560M
Capitol Bancorp
$0.04 $0.04 $201M
Citizens Republic Bancorp
$-2.31 $-2.53 $303M
CVB Financial(Nasdaq:CVBF) $0.19 $0.21 $856M
Enterprise Bankcorp
NA $0.22 $91.5M
Flagstar Bancorp
$-0.02 $0.22 $318M
Great Southern Bancorp
$0.46 $0.47 $135M
Guaranty Bancorp
$0.05 $0.04 $212M
Huntington Bancshares
$0.23 $0.25 $2.55B
Independent Bank
$0.56 $0.51 $397M
Lakeland Bancorp
$0.23 $0.12 $248M
MBT Financial
$0.13 $0.11 $74.5M
People\'s Financial
$0.42 $0.41 $120M
PacWest Bancorp
NA $0.47 $508M
Provident Bankshares
$0.30 $0.41 $302M
Simmons First National
$0.53 $0.42 $402M
Zions Bancorp (Nasdaq:ZION) $0.74 $0.65 $2.81B

It wasn't all stellar, but two things stick out:

1. There were far more gains than losses, even if the gains were smaller than last year's comps.
2. Several of these smaller and regional banks topped estimates. Not all did, but many did.

Bottom Line
Whatever subprime issues were ailing both groups - large and small - seem to not be much of a problem for the smaller banks any longer. Perhaps it's because they have fewer (relatively) non-performing loans to deal with. The big banks still have lots of bad loans on the books, setting up more quarters like this one.

As such, enjoy whatever rally there is from the major banking stocks; I don't think they have the right stuff to sustain the interest. Regional banks, on the other hand, are actually justifying their values with decent results.

For more on evaluating banks, check out Analyzing A Bank's Financial Statements.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center