Edison, N.J.-based Midlantic Corp. came out an overall winner in a third-quarter performance survey put together by the American Banker and SNL Securities.
Midlantic reported a return on average assets of 2.30%,. which was not only the best in its class (large regional banks with assets between $10 billion and $20 billion), but also the top score of all 62 banks surveyed.
American Banker and SNL compiled the data from the largest U.S. banking holding companies, as measured by asset size.
Midlantic also ranked first in return on common equity, with 24.02%, and was the bank that showed the largest change for the better in nonperforming assets to total assets, dropping a full 432 basis points from 6.87% of non-performers to total assets at Sept. 30 last year to its recent 2.55%.
The $13.3 billion-asset company also showed the greatest improvement in efficiency among the country's biggest banks. Midlantic's ratio of expenses to earnings was down nearly nine basis points to 57.34% from last year's whopping 66.08%.
While not wanting to take anything away from the bank's impressive showing, Fox-Pitt Kelton analyst Denis Laplante points out that a $28 million tax benefit had an almost steroid-like effect on Midlantic's ROE and ROA.
"They've done a tremendous job over there," he said. "But if you adjust for the $28 million, ROA would be closer to 1.5% and ROE would be at around 16%."
Like many banks hit hard by the real estate and general recession of the early 1990s, Midlantic suffered heavy losses in 1990 ($195 million) and 1991 ($543 million).
Consequently, it has had six straight quarters of tax benefits which go straight to the bottom line. But the tax benefits will end this year, Mr. Laplante says.
As far as expectations go, Midlantic performed as well as any bank in this group, even better, he added. And a 1.5 ROA is nothing to sneeze at.
However, Duff & Phelps' Claire Percarpio says profitability at San Francisco-based Wells Fargo & Co. is equally impressive.
Wells' 21.39% return on average equity was number one among superregional banks, or those with assets between $20 billion and $70 billion, according to the survey.
And, Wells tied for first place in return on average assets with Minneapolis-based First Bank System Inc., with a 1.67% showing.
But this is nothing new for Wells, Ms. Percarpio noted. "They've always been very good with expense control and profitability. Even in this credit cycle, they've performed well in ROE and ROA. Wells Fargo has always been very bottom-line focused," she said.
What really pleases Ms. Percarpio about Wells is the $52.2 billion-asset bank's loan provision of .58%.
She argues that banks like First Interstate Bancorp and First Bank are carrying loan provisions near or at zero that make earnings look better but are not sustainable over the long haul.
"Shawmut National Corp. and PNC Bank Corp. have provisions between zero and .1%. Midlantic has roughly .25% of loans as a provision, or 25 basis points. Over the long term, a more reasonable provision for a regional bank would be 60 or 70 basis points, depending on the loan mix," she said.
Of course, analysts agree that with the rigorous restructuring of loan portfolios undertaken by most large banks over the past few years, chargeoffs have come down considerably. And as a result, it is fair to keep provisions low.
But zero provisioning is just too cocky, according to Ms. Percarpio.
Perhaps it's not a concern now, but "in 1996, 1997 when they have to have a normal provision and they're pressed for earnings growth" -- watch out. "You know what this industry does when it's pressed for earnings growth," she said. "It tends to do dumb things."
