News that Barclays Plc (NYSE:BCS) is intent on merging with ABN Amro Holding NV (NYSE:ABN) made us wonder: Just how are the US banking units of ABN performing these days? The answer looking at the financial statement data provided to the FDIC for year-end 2006 is so-so.

Based on the $121 billion in total assets of its subsidiary banks, ABN ranks 13th among US bank holding companies ("BHCs"). BCS, which is one of the largest banks in the world, does not even show up among the top 100 US BHCs because most of its US operations are focused on securities and derivatives via its Barclays Capital unit.

The table below shows the summary profiles from the IRA Bank Monitor for the three US bank units of ABN as of December 31, 2006. As the figures suggest, the largest bank is a peer performer in its industry specialization category, but the second largest bank is in some respects down right mediocre.

The IRA Bank Monitor: HOLDING COMPANY DRILL DOWN REPORT

The lead bank unit, LaSalle Bank NA, is currently performing just above peer in terms of ROA and ROE, but this uptick in performance is a relatively new development. In fact, the $73 billion asset commercial lender has performed at or below peer for the past several years, a surprising fact given the strong performance of its peers -- even in the mid-west. The above-peer ROE of 16% for 2006 came after three quarters of below-peer results. The operative descriptive here is instability in terms of the consistency of its financial results.

With a ratio of net interest income to gross noninterest income of 2:1 and an efficiency ratio of 50%, LaSalle Bank NA falls in the middle of the peer group. In terms of credit performance, the bank's default experience peaked at 90bp at the end of 2002, but has since trended below peer to just 13bp at the end of 2006.

Loss Given Default ("LGD") for LaSalle Bank NA was consistently above-peer through the 2001-2003 period, well above 90%, but then plunged down to the 50% level and gyrated wildly through the past two years, including two quarters of negative defaults, until it ended 2006 at a very respectable 56%. Again, the term which comes to mind looking at the bank's five year credit performance history is unstable.

The second largest US unit of ABN, LaSalle Bank Midwest National Association, ended 2006 well below peer in terms of ROA and ROE. Again, unstable is the adjective that occurs to us looking at this bank's financial results.

LaSalle Bank Midwest National Association began 2000 performing above peer in terms of ROA, then dropped well-below peer in 2001. As 2002 began, LaSalle Bank Midwest surged well-above peer, reaching a remarkable annualized ROA of almost 3% in Q1 2003. The bank's performance trended lower from that point, although it finished 2003 at a very respectable 2% ROA, but from there the bank fell below peer and has remained so ever since.

More alarming than the financial performance is the credit experience of LaSalle Bank Midwest. While the LGD for the peer group has been trending down through 2006, the bank's LGD has been rising steadily and finished the year at almost 75% vs. 23% for the peer group generated by the IRA Bank Monitor.

The WAM on the loan portfolio of LaSalle Bank Midwest finished 2006 at over 6 years vs. 3.6 years for the peer group, but actually started 2006 at almost 9 years -- an enormous amount of duration risk. While the combined WAM for the three US banks in the ABN group is 3.4 years, a bit below peer, the long maturity of LaSalle Bank Midwest is, to us, remarkable.

Bottom line: A number of analysts have mentioned that acquiring ABN is a good way for BCS to grow its US banking business. If we were the folks at BCS responsible for diligence on this transaction, we'd want to know why the performance of the two largest US bank subsidiaries of ABN has been so variable.

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