Banking's Top Performers: Part 1: Banks with Assets over $3 Billion: 2007 Began as the Best of Times and Ended as the Worst of Times. Yet the Top Performers Still Managed to Excel. Here's How They Did It

[ILLUSTRATION OMITTED] It's seems long ago now, but the first quarter of 2007 was a very strong one for banks. After that, things quickly began unraveling, and banks and thrifts faced significant obstacles throughout the rest of the year. Many institutions were adversely affected, even though only a handful of them were directly involved in what turned out to be the last straw of a credit boom-subprime lending. Despite the Federal Reserve's aggressive rate cutting in the second half, the cost of funds remained high, resulting in further margin compression at most banks. Many subprime and nontraditional mortgages began to turn sour, affecting both credit quality and the ability of banks to access the secondary markets. As borrowers defaulted on more and more mortgage loans, institutions of all sizes found themselves forced to take large writedowns or increase their provisions. These conditions led to the first bank failures since 2004 and caused institutions that had previously appeared among our top performers-Citigroup, First Horizon National, IndyMac Bancorp, and National City to name a few--to drop to the bottom of our rankings. By the fourth quarter, the FDIC was reporting that the earnings of insured institutions were the lowest they had been since 2002. The performance of this year's top 25 public and top 10 private or foreign-owned banks and thrifts is all the more impressive for exhibiting strength despite the prevailing adverse conditions. The aggregate industry statistics tell an already familiar story, but this year's top performers managed strong performance in a year where most banks were happy to just squeak by. In this, Part One of the 16th annual ABA Banking Journal performance report, we will review the financial results and strategies of the nation's largest banks and thrifts. Part Two, which will appear in June, will highlight the top performing community banks and thrifts of 2007. Selection criteria Our study ranks the performance of domestic depository institutions with assets over $3 billion as of Dec. 31, 2007. Two groups were included in our analysis: publicly held depository institutions (banks, thrifts, and bank or financial holding companies) and private or foreign-owned depositories (defined in greater detail below). A total of 157 public banks, thrifts, and holding companies and 43 private institutions qualified under our selection criteria. They were ranked by return on average total equity for 2007. In instances where the reported ROAE was identical for two or more institutions, 2007 return on average total assets (ROAA) was used as a secondary ranking criterion. Data were provided by SNL Financial LC as of December 2007. Securities and Exchange Commission filings were the source for public company data, and regulatory filings were the data source for private and foreign-owned institutions. (Five banks met our selection criteria but were not included in our analysis because data were not available at the time this article was sent to print. Those institutions are: Doral Financial Corp., San Juan, P.R.; NetBank, Alpharetta, Ga.; BFC Financial Corp., Fort Lauderdale, Fla.; HSBC North America Holdings, Prospect Heights, Ill.; and Fremont General Corp., Santa Monica, Calif.) Three winning strategies This year's top 25 public banks and thrifts are those who made the best of a bad situation. To get an idea of the difference in overall industry performance between 2006 and 2007, one need only look at the drop in the return on average equity (ROAE) that an institution needed to qualify: last year, the 25th institution had an ROAE of 17.26%, while this year, City National of Beverly Hills, Calif. (#25) made it with an ROAE of 13.92%. This year's top performers used three main strategies to counter the inhospitable operating environment: growing noninterest income, focusing on a particular niche business or consumer segment, and improving overall efficiency. …

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