Be Careful When Generalizing About Banks

by: Tom Brown

It has been incredibly frustrating over the last year or more to listen to so many people who ought to know better refer to “the banking industry” as if it’s some huge, undifferentiated monolith, when in fact they’re often really referring to just a segment of the business (the ten biggest banks, for instance) or to just one or two large institutions.

That’s nuts. Despite consolidation, the U.S. still has over 8,000 banking companies, many of which are publicly traded. There are huge differences--in asset mix, size, and location, for instance--among these institutions. Those differences can create investment opportunities for individuals who don’t view the industry so myopically.

The earnings season that’s just started offers a good example of what I’m talking about. Take a look at the reports from three regional banks that released their results this week. They couldn’t be more different. See for yourself:

First is Bank of the Ozarks (NASDAQ:OZRK), a $3 billion banking company located in Little Rock, Ark. On Monday, the company reported earnings of 55 cents per share vs. 46 cents a year ago, up 20%. Bank of the Ozarks has reported eight consecutive years of record net income; this most recent quarter was its fourth straight record quarter for both revenues and E.P.S. Net interest margin was: 4.73%, up 104 basis points from a year ago, while nonperforming assets came in at 1.17% of total assets. The company’s tangible common equity to total assets rose to 8.4% from 6.8% last year. Bank of the Ozarks seems to be shooting the lights out.

Next, there’s Mercantile Bank (NASDAQ:MBWM), a $2 billion bank in Grand Rapids, Michigan. It reported a $4.5 million loss yesterday, vs. a $3.7 million loss a year ago and a $300,000 profit in the fourth quarter. Mercantile has now lost money in three of the past five quarters. In the quarter, its nonperformers jumped to 3.7% of total assets, from 2.6% at yearend and 1.9% last year. The company continues to struggle along with the Michigan economy.

Finally, look at Kansas City’s Commerce Bancshares (NASDAQ:CBSH) with $18 billion in assets. On Tuesday, the company reported earnings of 40 cents per share vs 84 cents a year ago and 57 cents in the prior quarter. The year-on-year earnings decline was driven mainly by a higher loan loss provision, of $43 million vs. $20 million. Earnings fell sequentially, largely because of a 23-basis-point decline in the net interest margin.

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Three regional banks. One reports yet another record quarter, along with a big rise in its net interest margin. Another reports yet another loss due to a dodgy local economy and a rising loan loss provision. And a third reports lower earnings because of a meaningful compression in net interest margin.

The results couldn’t be more different. Yet all three companies are in the exact same business of taking in deposits and making loans.

This is one reason I wince whenever I hear people make broad proclamations that “the banking system is insolvent,” or that “zombie banks” are loose across the land. Notably, these same people tend to go mum when asked which institutions in particular are the zombies. I can see why. Yes, some large institutions have had some problems lately that have been well-publicized. But other institutions, both large and small, are doing very, very well. It’s a dangerous oversimplification to paint the industry with a single broad brush. As we’ve seen, there’s just too much difference among the players.