Going For Gold: 2012 Bank Performance Scorecard

The year 2011 was probably most notable for all the things that didn’t happen. The U.S. economy didn’t tumble into a double dip recession as some economists once feared, even though growth was modest at best. The long awaited boom in bank mergers didn’t occur either, as many prospective buyers and sellers were held back by a combination of valuation, capital and asset quality issues. And it was a year in which there were markedly fewer bank failures than in previous years-there were 92 failures in 2011 compared to 157 in 2010-as the industry slowly recovered from the Great Recession of 2007-2009 and the worst financial panic since the late 1930s.

It was also a great year for comebacks as evidenced by three determined institutions-Columbus, Ohio-based Huntington Bancshares Inc., National Penn Bancshares in Boyertown, Pennsylvania, and Wellsboro, Pennsylvania-based Citizens & Northern Corp.-which rebounded strongly in 2011 after stumbling a few years earlier. Huntington finished second on the Bank Director magazine 2012 Bank Performance Scorecard for institutions with $50 billion in assets and above; National Penn placed a respectable 12th in the $5 billion to $50 billion asset category; and Citizens placed 1st in the $1 billion to $5 billion category. All three companies reported solid profits in 2011 after posting big losses in 2009, and now appear to be on an upward earnings curve and should perform even better on the 2013 ranking.

The Scorecard is a ranking of publically owned U.S. banks and thrifts that are listed on the NASDAQ OMX and NYSE EURONEXT stock exchanges. There are 467 institutions in this year’s ranking, divided into four separate asset categories:

In previous years Bank Director ranked the 150 largest public U.S. banks as a single group. But after several decades of consolidation, in which a few very large banks now control the lion’s share of deposits and several thousand smaller banks account for the rest, it no longer makes sense to compare, say, JPMorgan Chase & Co.-at nearly $2.3 trillion, the country’s largest bank-with $1.3-billion asset Citizens & Northern. While each company is technically speaking a “bank,” they have such different asset mixes, funding sources and business models that they are more dissimilar than they are alike.

As in previous years, the 2012 Bank Performance Scorecard used five key metrics that measure profitability (core return on average assets and core return on average equity); capital strength (ratio of tangible common equity to tangible assets); and asset quality (ratio of nonperforming assets to loans and real estate owned, and the ratio of net charge offs to average loans). For scoring purposes, the ROAA, ROAE and TCE scores were given a full weighting, and the two asset quality metrics were given a half-weighting. The five category scores were then added across and the sum equaled each bank’s final score.

Because the Scorecard ranks banks based on the combination of profitability, capitalization and asset quality, institutions that do well often have good marks on all five metrics rather than place first in any one category. The relationship between return on average equity (ROAE) and tangible capital is particularly telling. A bank that has a high ROAE in part because it has less capital than other institutions in its size category might have a lower final score than those banks that have somewhat lower ROAEs but higher tangible capital ratios. The key to doing well on the Scorecard is to be highly profitable and well capitalized, instead of being more highly leveraged.

“We think this is a very balanced way to look at a company in the banking industry,” says Mark Fitzgibbon, a principal and director of research at Sandler O’Neill + Partners in New York. As it has in past years, Sandler O’Neill performed the analysis and constructed the 2012 Scorecard ranking, using data provided to it by SNL Financial LC in Charlottesville, Virginia.

The first place finisher in the $50 billion and above category was McLean, Virginia-based Capital One Financial Corp., followed by Huntington and Wells Fargo & Co. in San Francisco. There were 19 banks overall in this grouping.

Sitting atop the $5 billion to $50 billion category, which included 75 banks overall, was Santa Barbara, California-based Pacific Capital Bancorp-another comeback kid of sorts. The bank reported a $431 million loss in 2009, followed by a $146 million loss in 2010, when it was acquired by famed Texas bank investor Gerald J. Ford. Ford Financial Fund L.P. injected $500 million into the bank, which enabled it to overcome a sharp decline in asset quality during the recession. The bank returned to profitability in 2011, and in March of this year Ford inked an agreement to sell it for $1.5 billion to San Francisco-based UnionBanCal Corp., a subsidiary of the Japanese banking conglomerate Mitsubishi UFJ Financial Group. Finishing 2nd and 3rd, respectively, were BankUnited Inc. in Miami Lakes, Florida, and San Francisco-based First Republic Bank.

In the $1 billion to $5 billion category, Citizens & Northern was followed in 2nd and 3rd, respectively, by First Financial Bankshares Inc. in Abilene, Texas and Blacksburg, Virginia-based National Bankshares Inc.

The top ranked bank in the $1 billion and under category was Berkshire Bancorp Inc. in New York, followed by Commercial National Financial Corp. in Latrobe, Pennsylvania, and Reston, Virginia-based Access National Corp.

An industry-wide trend that drove the financial performance of many banks in 2011 was a significant improvement in asset quality, which allowed them to reduce their loan loss provisions and increase their earnings for the year. Scott Siefers, a managing director in Sandler O’Neill’s equity research department, also cited a big improvement in the efficiency ratios of many banks last year, which further enhanced their profitability. “There was a big emphasis placed on the expense side of the income statement,” he says.

Who will be the stars of the 2013 Scorecard, based on their performance in 2012? Sandler O’Neill’s Fitzgibbon expects that improvements in asset quality and declining loan loss provisions, which contributed so heavily to bank earnings in 2011, will be less of a factor in 2012 as the industry’s recovery takes hold.

What will separate the men from the boys will be profitability, he says. “In 2012, we’ll see that the big differentiator will be ROA and ROE.”

Stay tuned.


Jack Milligan


Jack Milligan is editor-at-large of Bank Director magazine, a position to which he brings over 40 years of experience in financial journalism organizations. Mr. Milligan directs Bank Director’s editorial coverage and leads its director training efforts. He has a master’s degree in Journalism from The Ohio State University.

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