Revenue Rising for Regional Bank

Watching regional banks is like eating a dry piece of toast: It might fill you up, but it really doesn't satisfy you like a bagel with cream cheese or a big multinational bank would. We all know what eating too many fatty foods will do to your body, so supplementing the desirable with the practical in eating and investing will help strike a good balance.

Michigan-based Mercantile Bank (NASDAQ:MBWM) reported second-quarter earnings of $0.43 per share today, which was a cent better than analysts' expectations and a 23% improvement from last year's net earnings. The company's total revenues, which are made up of net interest income and non-interest income, increased an impressive 26% in the period driven by robust loan growth and a steady net interest margin. Mercantile was able to produce these excellent revenue numbers despite a material decline in mortgage fees due to rising interest rates.

So, the question is, are big banks really more desirable than smaller banks? That question was recently raised by Selena Maranjian, and I wanted to expand on my dry-toast analogy. I tend to hold accounts at larger banks because they offer enhanced services (such as online banking) and don't charge me an arm and a leg if I can maintain a certain minimum balance. On the other hand, we have hit the age of corporate America where big-name chains rule and local proprietors must hustle just to stay in business.

However, all of this big-company dominance shouldn't point investors to focus exclusively on big banks such as Citigroup (NYSE:C) and Bank of America (NYSE:BAC). If investing were that simple, then Wall Street would be simply a street full of blank walls instead of the investing center of the world. One look at superior regional banks such as Mercantile and Fifth Third Bancorp (NASDAQ:FITB) reveals that these local dynamos serve their markets with great effectiveness and have a quite loyal customer base.

I learned years ago that an effective portfolio is a diversified portfolio: Alternating a bagel smeared with cream cheese with some dry toast is probably a smart choice and will also make an effective mix. Blending big banks with smaller banks in your core holdings will help you strike a balance that will alleviate some of the inherent risks associated with rising interest rates.

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Fool contributor Phil Wohl spent more than 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firm mentioned above.