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
(Nasdaq:AMRB)
$0.34 $0.36 $56.3M
BancorpSouth
(NYSE:BXS)
$0.41 $0.49 $1.67B
Berkshire Hills Bancorp
(Nasdaq:BHLB)
$0.55 $0.55 $258M
Brookline Bancorp
(Nasdaq:BRKL)
$0.07 $0.06 $560M
Capitol Bancorp
(NYSE:CBC)
$0.04 $0.04 $201M
Citizens Republic Bancorp
(Nasdaq:CRBC)
$-2.31 $-2.53 $303M
CVB Financial(Nasdaq:CVBF) $0.19 $0.21 $856M
Enterprise Bankcorp
(Nasdaq:EBTC)
NA $0.22 $91.5M
Flagstar Bancorp
(NYSE:FBC)
$-0.02 $0.22 $318M
Great Southern Bancorp
(Nasdaq:GSBC)
$0.46 $0.47 $135M
Guaranty Bancorp
(Nasdaq:GBNK)
$0.05 $0.04 $212M
Huntington Bancshares
(Nasdaq:HBAN)
$0.23 $0.25 $2.55B
Independent Bank
(Nasdaq:INDB)
$0.56 $0.51 $397M
Lakeland Bancorp
(Nasdaq:LBAI)
$0.23 $0.12 $248M
MBT Financial
(Nasdaq:MBTF)
$0.13 $0.11 $74.5M
People\'s Financial
(Nasdaq:PFBX)
$0.42 $0.41 $120M
PacWest Bancorp
(Nasdaq:PACW)
NA $0.47 $508M
Provident Bankshares
(Nasdaq:PBKS)
$0.30 $0.41 $302M
Simmons First National
(Nasdaq:SFNC)
$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

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  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 >>
COMPANIES IN THIS ARTICLE
Trading Center