An American Banker Roundup

The regional banking companies that reported Tuesday met or beat fourth-quarter profit expectations on deposit growth and gains from fee-generating businesses, but all reported double-digit increases in nonperforming assets.

Wells Fargo & Co., which has mostly avoided credit-quality concerns until now, was a case in point. The San Francisco banking company said its profits rose 9% from a year earlier, to $1.128 billion, and that per-share earnings met analysts' consensus estimate of 65 cents.

Wells revealed that it was hit by a large problem loan, a $122 million exposure to "a borrower in the commercial finance industry." This loan, believed to be part of a syndicated credit to the beleaguered Finova Corp., is also understood by observers to have hurt Bank of America Corp.'s performance in the quarter.

Analysts said the Finova credit is likely to turn up in future earnings reports - such as that of Pacific Century Financial Corp., which is understood to have had a $65 million exposure to the company.

KeyCorp of Cleveland, which is in the middle of a restructuring, said its fourth-quarter profit was unchanged at $266 million, or 62 cents per share. Still, the results beat the forecasts of Wall Street analysts by two cents per share as the company posted strong deposit and revenue growth.

Fifth Third Bancorp in Cincinnati said its fourth-quarter profit doubled, to $236.4 million, and its per-share earnings of 50 cents met Wall Street's expectation. Firstar Corp. of Milwaukee, which announced in the fourth quarter that it was buying rival U.S. Bancorp, said its profit rose 30.6%, to $350 million.

Amsouth Bancorp said gains from leveraged lease transactions and sales of branches in Kentucky and Virginia helped it post profits of $126.6 million, compared with a loss of $62.6 million a year earlier.

"It is hard to tell how severe this turn is going to be," said Brian Stephens, a partner at KPMG Financial Services. "The effects of the credit cycle are starting to take a hold on the commercial and retail side. Credit issues are back on senior management's radar screen."


Fueled by growth in commercial lending and home equity loans, the company's net interest income rose 7%, to $2.8 billion. Its loan portfolio totaled $161 billion at the end of the quarter, a 21% increase from the year earlier.

Though average core deposits grew 9%, the gap between loan and deposit growth continued to squeeze Wells' net interest margin, which fell to 5.30%, down from 5.46% the previous year.

In a prerecorded conference call, Ross Kari, chief financial officer, said this situation could recur. "The continued trend of loans growing faster than our core deposits may cause our net interest margin to decline," he said.

Wells had completed the last few quarters relatively unscathed by the big problem credits that have rocked other large regional companies. Mr. Kari emphasized that the nonperforming loan increase in the fourth quarter was exceptional.

"The bank was participating in the syndicated credit primarily as an adjunct to substantial noncredit services we provided," Mr. Kari said. Further, the borrower had been a customer since the 1970s of the old Wells Fargo and Norwest Corp., which merged in 1998, he said.

James Bradshaw, an analyst at D.A. Davidson & Co., said nonperforming loans "were up a little higher than we expected," but even the company's big problem loan "in the grand scheme of things is pretty small."

The fourth-quarter results also reflected Wells' acquisition of First Security Corp. of Salt Lake City, which cost $180 million for integration.

Shares of Wells Fargo rose 2.57% to $49.9375.


KeyCorp's expenses fell 20%, to $705 million. Nonperforming loans rose nearly 10% from the third quarter, to $650 million. The company said this reflected the impact of a weaker economy.

The $87 billion-asset company announced in September that it would eliminate 2,300 jobs, or 10% of its work force, as part of a restructuring aimed at reviving profits and cutting $360 million of annual expenses.

The company also said it plans to cut its number of business lines in half, to 11, in an effort to centralize these divisions.

"Key's 2000 performance is particularly gratifying considering that this has been a year of significant change for the company," said Robert W. Gillespie, chief executive officer. "We fully expect that the internal operating practices implemented during the year will allow us to tap Key's full economic potential."

Still, it continues to struggle for growth. Fee income fell 24% from a year earlier, to $508 million. Fees from investment banking declined 15%, to $94 million, and fees from trust and investment services fell almost 3%, to $150 million.

Credit card fees plunged 87.5%, to $2 million. The company sold its card unit in the first quarter of 2000 to Associates First Capital Corp.

Deposits rose 12% in the fourth quarter and 7% for the year.

Shares of KeyCorp climbed 2.96% to $28.25.


The company's fourth-quarter per-share earnings of 37 cents met Wall Street's expectation.

Firstar said its 1999 acquisition of Mercantile Bancorp helped boost profits. "We have exceeded the goals we established for the transaction well ahead of schedule," said Jerry Grundhofer, Firstar's CEO. "We gained synergies through this acquisition, which enabled us to achieve industry-leading efficiency in 2000."

In the fourth quarter Firstar also bought 41 First Union branches in Tennessee with $424 million of loans and $1.78 billion of deposits.


Excluding charges of $84 million in the fourth quarter of 1999, the company's earnings rose 18%.

Fifth Third, which has $45 billion of assets, said solid deposit growth and increases in fee income contributed to the rise in profits. Deposits jumped 19%, to $31 billion. Fee revenues rose 18%, to $1.01 billion, driven by a 33% increase in data processing revenue.

Nonperforming assets rose 22% from the third quarter, to $100 million.

"Our outlook for 2001 continues to be positive across all of our businesses, but we are mindful and prepared for the challenges that a slower economic environment could bring," said George A. Schaefer Jr., president and CEO.

Fifth Third said it is keeping a watchful eye on its credit quality. "We are cautious, as we always are," Mr. Schaefer said. "We are used to ebbs and flows of the economy."

The loan-loss provision jumped 32% from a year earlier, to $23.1 million. "Our level still remains the best among the industry," said Neil E. Arnold, executive vice president, during a conference call with investors Tuesday. "It is a level we can withstand. We are certainly cautious."

Mr. Schaefer said the company would close its $4.9 billion acquisition of Old Kent Financial Corp. of Grand Rapids, Mich., in the second quarter.

Shares of Fifth Third rose 2.35% to $54.4189.


The Birmingham, Ala., company's per-share earnings of 34 cents met the consensus estimate of analysts.

Fee revenues at $38.9 billion-asset Amsouth declined 7.6% from a year earlier, to $199.5 million. The decrease reflected the third-quarter sale of IFC Holdings Inc., an investment products marketing firm that came to Amsouth as part of its 1999 purchase of First American Corp. of Nashville.

Amsouth's credit quality is also deteriorating. Nonperforming assets climbed nearly 21% from the third quarter, to $196.3 million.

The increase in nonperforming assets came mainly from three large syndicated loans, the company's executives said in a conference call Tuesday. Though it is leaving the syndicated lending business, nonperforming assets could rise 10 or 20 basis points during the first quarter, to about $400 million, they said.

Michael Granger, an analyst at J.P. Morgan Chase & Co., said that though Amsouth's revenue picture is starting to turn around "there is still some caution, because its nonperforming assets continue to increase" and were higher in the fourth quarter than he had expected.

Excluding charges related to the First American purchase, expenses fell 13% from a year earlier, to $284.3 million. The company said it achieved its goal of cutting $100 million of annual costs last year.

Net income for the full year fell 3.3%, to $329.1 million. The company attributed the drop to charges related to the First American deal, a third-quarter restructuring, and one-time charges incurred in the second quarter for business divestitures.

Amsouth's stock rose 4.7% to $16.75.

Laura Mandaro, Patrick Reilly, and Alissa Leibowitz contributed to this report.

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