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.

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