January 19, 2010 - A rose is a rose is a rose. Thank you Gertrude Stein for that observation. But a bank is not a bank is not a bank. That's because not all banks are serving the same market nor are they all offering the same loans. If you're going to invest in banks, be sure you understand who they're lending to and what kind of loans they have on the books.

They can make all kinds of loans but many tend to stick with single-family loans, small apartment loans, and some commercial loans like strip malls or gas stations. They know real estate trends, and the people borrowing, very well. They limit their exposure to local demand. That's good and bad. Good if the community is booming. Bad if the community is Detroit.

They don't do proprietary trading for their own account, take positions on interest rate swaps or other esoteric financial exercises. Community banks are often sought after by Regional banks and usually sell for a good premium when bought because they have a strong market share, one that is usually difficult to duplicate except over a long period of time, if ever.

Regional banks are much larger than community banks. They are usually a network of banks throughout large regions. Many have grown by simply buying community banks and changing their names. They have a headquarters, the hub of the network, that dictates terms and conditions, sets rates, and standardizes the bank's offerings.

Regional banks usually have a cost advantage over community banks, running many smaller banks with one administration cost spread out over many branches. They offer more loan types and services. They will typically make the single family and apartment loans and commercial loans on a larger scale. They'll also offer more types of loans and deposits as well as participate in larger deals from National banks. They're more diversified but they're also more exposed to more risk because they have more and larger loans or investments. They will usually have a lower valuation than community banks because of the higher risk.

At the very top (some would suggest the bottom these days) are the National banks, at least in terms of size, ones like Bank of America and Citibank. These are the banks that offer everything from foreign exchange to credit default swaps to single family mortgages to loans to an oil wildcatter. They're into everything, and they're everywhere. That's good and bad.

Good when the deals are so large that the payoff is extraordinary. Bad when the deals are so large, then get smaller until finally they disappear. That's what a lot of deals look like these days. And the deals these banks do aren't limited to the U.S. They go abroad to find problems, I mean opportunities. When the global economy is humming, these banks sing. When it's like it is today, they look around and try to figure out how they got in such a mess, and more importantly, how to get out of it.

But they don't worry too much. They have the government to bail them out when things get too bad. Maybe you've read something about this. I won't go any further with this because this is a family site.

The point for investors: know what kind of bank you're buying, the kinds of loans they're making, the communities or regions they serve, and their capital strength. More capital is better. It cushions the bank against losses. Banks can be good investments, if they make money and have prudent investments. Just like any other stock, you have to know what you own. Tread carefully in the bank sector but tread. There's good in there.

- Ted Allrich