Banking's Top Performer 2007: Another Stellar Year, but Will 2006 Be the End of a Good Run?

A gauntlet was thrown down last year, and banks and thrifts rose to the challenge. The yield curve became inverted in the first quarter of 2006. Long-term rates recovered during the beginning of the second quarter, but by June short-term rates had risen above them again. Although the two rates remained close during the second half of the year, the curve continued to be slightly inverted, causing margin compression at most banks. This compression was exacerbated by the continuation of trends that appeared in 2005: the cooling of the residential real estate lending market and the movement of deposits into accounts with ever-higher rates. Despite that challenging environment, banks and thrifts finished another year of record earnings performance in 2006. To counter the adverse factors, some institutions, including this year's top performers, shifted lending activities away from one-to-four family and multifamily mortgage lending and toward commercial and industrial lending to recover interest income. At the beginning of the year, institutions were buying mortgage lenders (Wachovia's purchase of Golden West Financial), but by the end of the year they were selling them (National City's divestiture of First Franklin Financial). In addition, many companies began to either cut costs or cut their losses on unprofitable lines of business, narrowing their focus to core business lines or niche markets in which they believed they had a competitive advantage. These tactics prompted two mergers-of-equals in 2006, between Regions Financial and AmSouth and between Bank of New York and Mellon Financial. Others simply shifted geographic focus to high-growth markets. In general, increased consolidation among banks and thrifts was a strong trend in 2006: a total of 287 deals were completed by year-end, relative to 267 in 2005. In Part One of the 15th annual ABA Banking Journal performance rankings, we review the financial results and strategies of the nation's largest banks and thrifts. Next month we'll highlight the top-performing community banks and thrifts. Selection criteria Our study ranks the performance of domestic institutions with assets over $3 billion as of Dec. 31, 2006. Two groups were included in our analysis: publicly held depository institutions (banks, thrifts, and bank or financial holding companies) and private depositories. A total of 153 public banks, thrifts, and holding companies and 51 private institutions qualified under our selection criteria. They were ranked by return on average equity for 2006. In instances where the reported ROAE was identical for two or more institutions, 2006 return on average assets was used as a secondary ranking criterion. (Three banks met our selection criteria but were not included in our analysis because their data were not available at the time this article was sent to print. Those banks were: Doral Financial Corp. of San Juan, P.R.; RG and Fremont General Corp. of Santa Monica, Calif.) Data were provided by SNL Financial as of December 2006. Securities and Exchange Commission filings were used as the source for public company data, and regulatory filings were the source used for private institutions. Movement among the top ten The top performer, Bank of New York Company of New York City, significantly improved its standing from a rank of 43rd in 2006, aided by a gain from the sale of its retail and middle market banking businesses to JPMorgan Chase in October 2006. As part of that deal, Bank of New York purchased JPMorgan Chase's Corporate Trust business. In December 2006, the company announced that it will merge with Mellon Financial Corp. of Pittsburgh. The second-place institution, PNC Financial Services Group of Pittsburgh, also experienced a large improvement relative to last year's rankings. PNC's 2006 net income benefited from a one-time gain of $1. …