The CEO of regional financial holding company National City (NYSE:NCC) was "generally pleased" with the company's second-quarter results, according to the press release. That's probably putting it lightly.

Get this: Not one of the 23 analysts who follow the company (talk about a herd) thought it could earn more than the $0.83 it amassed in the year-ago quarter. Their estimates ranged from a sickly low of $0.70 to a high of $0.82 a share.

National City's final tally? A hefty $0.97 per share.

The analysts' pessimism was certainly based on the first quarter's fall in mortgage-related activity. At the time, the CEO characterized the drop as a return to normal levels after reaching record highs nationally. The flattening yield curve could also have been a culprit in analysts' reduced expectations.

The strong uptick in earnings was also surprising because the company has been touting its internal "Best in Class" project to stimulate revenue, cost, and organizational improvements. The program began this year, but its resulting "meaningful enhancements to earnings" weren't expected to emerge until 2006.

Strong growth in commercial and home equity lending helped average portfolio loans increase 26% over the year-ago period. Consumer and small-business deposit accounts increased by 3% and 4%, respectively, since the end of 2004. This helped drive average core deposits 10% higher than the year-ago quarter.

The company's net interest margin declined from 4.09% in the prior-year period to 3.85%, partly because of the flattening yield curve. The company posted return on average common equity and return on assets roughly in line with prior-quarter numbers: ROA was stable at 1.8%, while ROE declined from 20.1% to 19.7%. National City's efficiency ratio declined 60 basis points to just above 55%, well below the ratios of the company's peers. That's a positive sign for the bank's "bang for the buck."

How did this happen? I'd attribute the company's surprising performance largely to effective hedging activity. When that hedging gets factored out, the effects of the flattening yield curve and the accompanying drop in the net interest margin become a bit more pronounced. Net of hedging (a component susceptible to swings in either direction), this year's earnings were an adjusted $0.81, next to $0.90 for the comparable period last year.

When Motley Fool Income Investor recommended National City in January 2004, the company was resolving credit-quality issues. For example, net chargeoffs, the actual percentage of loans written off as uncollectible, stood at 0.83% for 2002. They were 0.27% in the quarter just completed.

Shareholders are sharing in this rising wealth in two ways. On July 1, the company raised the amount of its quarterly dividend by 5.7%. It now yields a robust 3.97% annually. The company also has an active share buyback program, which makes a lot of sense.

Before today's results, analysts expected the company to earn $3.01 a share. That values the company at a fairly reasonable 11.33 times 2005 expected earnings. Competitors Fifth Third Bancorp (NASDAQ:FITB), Keycorp (NYSE:KEY), and US Bancorp (NYSE:USB) respectively trade for 12.6, 12.4, and 11.7 times 2005 expected earnings.

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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned, but he's an avid reader of the Income Investor newsletter. Clickhereto see the Motley Fool's disclosure policy.