The Top Performing Banks

If there’s a poster child for the rebound that many large, publicly traded banks have enjoyed since the Great Recession of 2007-2009 and the global financial crisis that precipitated it, that company could well be Huntington Bancshares Inc. In 2009, the Columbus, Ohio-based regional bank was writing off hundreds of millions of dollars in bad loans, laying off employees and feverishly raising capital to stay afloat. Three and a half years later, those tough decisions have paid off handsomely: Huntington is the winner of the Bank Director 2013 Bank Performance Scorecard for institutions with assets of $50 billion and above.

Click here to review the Bank Performance Scorecard
on the digital edition of Bank Director.

The Bank Performance Scorecard is a ranking of publicly traded banks listed on the NASDAQ OMX or NYSE EURONEXT stock exchanges based on profitability, asset quality and capitalization, and has been divided into three asset size categories. In addition to Huntington, Miami Lakes, Florida- based BankUnited Inc. took top honors in the $5 billion to $50 billion asset category, while Bank of the Ozarks Inc. of Little Rock, Arkansas, placed first in the $1 billion to $5 billion category. There are a total of 289 banks in three asset size segments, and the ranking is based on 2012 calendar year data. As in past years, the investment banking firm Sandler O’Neill + Partners L.P. in New York constructed the rankings using data provided to it by SNL Financial LC, a research and database firm in Charlottesville, Virginia.

The improvement in the profitability of large, publicly traded banks, which was evident in the 2012 Bank Performance Scorecard ranking, became even more apparent in this year’s ranking. “We began to see the economy heal across the country and that led to a fair amount of differentiation across the industry,” says Mark Fitzgibbon, a principal and the director of research at Sandler. While some banks continued to struggle with asset quality and profitability issues in 2012-and the bottom reaches of each of the three ranking tables are littered with such institutions-many others returned to what might be considered normal levels of profitability.

If there was a single earnings driver that a broad range of publicly owned institutions benefited from last year, it was mortgage banking. The combination of low interest rates and a gradual recovery in housing prices nationwide sparked a home mortgage refinancing boom that many banks cashed in on. “Mortgage banking had a particularly banner year [throughout] the industry,” says Fitzgibbon. Spurred on by strong demand for higher yielding investments, Fannie Mae and Freddie Mac were willing to pay up for mortgage originations, which enabled many banks to record significant gains on their loan sales while also generating significant levels of fee income. “Investors were chasing yield [in 2012],” Fitzgibbon explains. “There was strong appetite from investors for product and that impacted what Fannie and Freddie were willing to pay.”

The 2013 Scorecard uses five key metrics that measure profitability, capitalization and asset quality. Core return on average assets (ROAA) and core return on average equity (ROAE) are used to gauge each bank’s profitability. The ratio of tangible common equity (TCE) to tangible assets, a conservative metric that excludes less reliable instruments like preferred stock and debt, is used to measure each bank’s capital strength. And the ratio of nonperforming assets to total loans and other real estate owned, and the ratio of net charge-offs to average loans, are used to assess each bank’s asset quality.

The banks received a numerical score in each of the five metrics from highest to lowest. These scores were then added across and the bank with the lowest total score in each of the asset categories was the winner. For scoring purposes, ROAA, ROAE and the TCE ratio were given full weighting, while the two asset quality metrics were each given a half weighting. Banks that rank high on the Bank Performance Scorecard typically do well in all of the metrics rather than dominate just one or two. The Scorecard rewards banks that are well balanced across the full spectrum of profitability, capitalization and asset quality-but with a slight bias towards profitability.

The overall improvement in publicly owned banks can be seen in a comparison of median values for the five performance metrics in 2012 and 2013. All but one improved in a year-over-year comparison.

Huntington improved upon its second place finish in the 2012 Scorecard to edge out M&T Bank Corp. for top honors on the $50 billion and above category this year. “We had good asset growth and our net interest margin stayed very strong through the course of the year, and we’re one of the few banks to have had that,” says Chairman and Chief Executive Officer Stephen Steinour. The bank reported a 3 percent increase in loans across the board in 2012 and posted especially strong loan growth in its mortgage banking and indirect auto lending operations. “They’ve carved out a huge niche in the indirect auto space,” says Sandler analyst Scott Siefers.

The bank also saw a significant improvement in asset quality last year and the resulting credit leverage also boosted its 2012 earnings, while core deposits grew 8 percent thanks in large measure to its innovative “Fair Play” consumer banking program that includes a highly popular free checking product. “They’ve done a really good job of grabbing new customers with the Fair Play strategy,” notes Siefers.

Buffalo, New York-based M&T finished just one point behind Huntington in the $50 billion and above group to take second place honors. M&T never experienced the degree of distress that many other large regional banks did during the recession. The bank’s loan charge-off rate never rose above 1 percent of total loans during the recession and it never had to cut its quarterly dividend to preserve capital. Instead, 2009 through 2011 was actually a period of significant investment in M&T’s future earnings potential: The bank made four acquisitions during that three year stretch, including Wilmington Trust Corp. in 2010. “Those were years of significant investment for us,” says Rene Jones, M&T’s executive vice president and chief financial officer.

M&T spent $90 million integrating its back office operation with Wilmington Trust’s, including the construction of a new data center in Delaware and the purchase of a second data center in Buffalo. Sandler analyst Joseph Fenech says there was some early concern that the integration was taking too long, but M&T was determined to take its time and ended up delivering a greater dollar amount of cost saves than it originally forecasted. Jones says the old Wilmington operation contributed significantly to M&T’s bottom line. “You saw the benefits of those investments pay off in 2012,” he says.

Some of the top ranked institutions in this year’s Scorecard have unusual stories. BankUnited, the winner of the $5 billion to $50 billion category, was acquired from the Federal Deposit Insurance Corp. in May 2009 by a group of private equity investors led by John Kanas after the company had failed. Kanas, the bank’s chairman and CEO who previously built North Fork Bancorp. Inc. into a regional powerhouse before selling it to Capital One Financial Corp. in 2006, has rebuilt BankUnited into a strong performer. [See the story about BankUnited on page 38.] Another high place finisher with an interesting story is Los Angeles-based CapitalSource Inc., which placed fourth in the $5 billion to $50 billion category. CapitalSource is a former specialty finance company that currently has an industrial bank charter but expects to convert to a state banking charter this year. The company makes commercial loans to small and medium-sized businesses in one of 10 asset categories including commercial real estate, equipment leasing and financing and health care. It funds itself primarily through 21 retail bank branches in California.

CapitalSource’s impressive profitability in 2012 was helped in large measure by its use of deferred tax assets that accounted for 42 percent of its reported $490 million in net income in 2012. Still, the company also benefited from strong loan growth last year across most of its asset classes. “Even with that very sizeable tax write-up, CapitalSource has been a really solid performer,” says Sandler analyst Aaron Deer.

“The significant thing that drove our profitability [in 2012] is that we have a high net interest margin and a very low level of credit charge-offs to subtract from that,” says Tad Lowrey, chairman and CEO of CapitalSource Bank. “We’re also very efficient in the way we operate and that helps keep costs low and the net interest margin up.”

The company also benefits from having a highly focused lending strategy, which enables it to underwrite loans more effectively than most of the generalists it competes against. “I’m a big fan of specialty, niche banking,” says Deer. “If you know what you’re doing you can get outsized returns.”

Bank of the Ozarks, which placed first in the $1 billion to $5 billion category, also relied on an M&A strategy to help deliver a strong earnings performance in 2012. “Our net interest margin continued to be among the best in the industry, our efficiency ratio was very good and our already excellent asset quality improved further during the year,” according to George Gleason, the bank’s chairman and CEO, who responded to questions by email.

But the bank also benefited from the acquisition of four failed banks from the FDIC in 2010, and three more in 2011, that expanded its retail franchise into North and South Carolina, Georgia, Florida and Alabama. These FDIC-assisted deals, in which the bank received limited protection for the acquired institutions’ bad loans, has helped drive its earnings in recent years. “That was a major factor behind their excellent profitability in 2011 and 2012, and helped sustain their net interest margin of 6 percent [in 2012],” says Fenech.

Sustaining a high net interest margin might be a sizable challenge in 2013, not only for Bank of the Ozarks but for the entire industry. The Federal Reserve Board’s monetary policy of keeping long-term interest rates low in an effort to stimulate the economy, combined with tough competition in the commercial loan market, has squeezed the margins of banks throughout the industry. But by early summer, long-term rates had already begun to climb modestly, “and if the economy continues to get better, that trend will continue,” Fitzgibbon says. Banks that aren’t able to reprice their loans as their funding costs start to climb will see their net interest margins compress even further.

“This year is all about the margin,” he says. “The top performers on next year’s ranking will be the ones who did a good job of managing their net interest margins.”

(Please note: Due to a data entry error, the final ranking results in the $1 billion to $5 billion asset category were stated incorrectly in the print version of Bank Director magazine. The correct ranking table can be found in the digital edition of the magazine.)