Special charges related to mergers clouded the fourth-quarter income statements of three major banks Thursday.
Strong showings in fee businesses and renewed vigor in commercial lending helped compensate for the one-time expenses.
Net income of First Union Corp. jumped 48%, to $857 million. That was despite a $205 million pretax merger charge related to the company's April acquisition of CoreStates Financial Corp. of Philadelphia. First Union's earnings per share of 87 cents was 12 cents below analysts' consensus estimate.
Merger charges also hit National City Corp. Its fourth-quarter profits of $291 million were flat compared with the prior-year period.
The $88 billion-asset National City took a $105 million charge related to its first-quarter purchases of First of America Bank Corp. of Kalamazoo, Mich., and Fort Wayne (Ind.) National Corp.
Wachovia Corp.'s net income of $242 million was substantially higher than the $3.6 million earned in 1997's fourth quarter. But the earlier number reflected $303 million of merger-related charges. Wachovia made two purchases in Virginia that year: Central Fidelity of Richmond and Jefferson Bankshares of Charlottesville.
Wachovia's operating income was up 17%, and the $1.19 per share equaled analysts' projection.
First Union Corp.
First Union of Charlotte, N.C., chalked up its fourth-quarter performance to gains in capital markets and asset management.
Without the CoreStates-related charge, earnings per share would have beaten Wall Street's consensus by a penny.
The year-ago quarter included a $225 million charge for First Union's November 1997 acquisition of Signet Banking Corp. in Richmond, Va.
For all of 1998, First Union's profits rose 7%, to $2.9 billion, or $2.95 per share, including merger-related charges.
Edward E. Crutchfield, chairman and chief executive officer, said the results show the bank's "progress in building a new kind of financial services company."
Six completed acquisitions during the last 18 months, including deals for the Richmond-based securities firm Wheat First Butcher Singer Inc. and Charlotte-based merger adviser Bowles Hollowell Connor & Co., "positioned us for greater market dominance," said Robert T. Atwood, First Union's chief financial officer, in an interview.
"They are starting to reap the benefits from the synergies with CoreStates," added Bradley Ball, an analyst at Credit Suisse First Boston.
First Union, which has $237.4 billion of assets, said its limited exposure to overseas markets and the breadth of its businesses helped it weather tough market conditions early in the fourth quarter.
Noninterest income rose 52%, to $1.78 billion. Fees from investment banking rose 50%, to $116 million. Revenues from the capital management unit, which includes retail brokerage, mutual funds, and asset management for individuals, rose 57%, to $471 million. Mortgage fees surged 72%, to $131 million.
"They are benefiting from their mix of business," said Carla D'Arista, an analyst at Friedman, Billings, Ramsey and Co. "You are getting the size (of a money-center bank) without the international exposure."
Corporate lending volume was up 12% from the third quarter. The balance sheet showed only 3% loan growth, to $134.4 billion, because of securitization, the bank said.
Analysts attributed the commercial lending results to illiquidity in financial markets last year that had many corporate customers flocking to traditional bank credit products.
Banks like First Union that target small and middle-market businesses are particularly well-situated, analysts said, because these are the customers showing the greatest demand for loans.
"Midsize companies are banging down the doors" looking for bank loans, Ms. D'Arista said.
First Union's operating expenses grew 18%, to $2.5 billion.
National City Corp.
Without the extraordinary charges, earnings at National City of Cleveland would have jumped 19%. Operating earnings per share of $1.06 exceeded analysts' estimates by 2 cents.
National City chairman David A. Daberko said with the integration of the two mergers completed, "We are totally focused on taking our businesses to even higher levels of performance."
Quarterly noninterest revenue rose 17%, to $625.5 million, boosted by mortgage banking fees and item processing revenue. Net interest income for the quarter was $747 million, a 7% gain, thanks to some loan growth.
But noninterest expense of $871.5 million, a 14% increase in from the year-ago quarter, offset the gains in revenue. The higher expenses were attributable to mergers.
"It's pretty much as we expected, but we're watching the margin and credit quality closely," said Diana Yates, an analyst with A.G. Edwards & Sons Inc. She noted National City's loan volume was up, but the net interest margin of 4.00% in the fourth quarter was down 32 basis points from a year earlier and down 10 basis points from the third quarter of 1998.
Fourth-quarter loan chargeoffs of $87 million were down 8% year to year but up 13% from the third quarter.
"I'll give them the benefit of the doubt on the chargeoffs, but the margin decline is something that could be more permanent," said analyst Michael Mayo of Credit Suisse First Boston.
"The trend in margins throughout 1998 has been narrowing," said Thomas A. Richlovsky, National City's treasurer. "The volume trend is clearly driving net interest income but at some cost, and that has been seen in the net interest margin."
Mr. Richlovsky said the chargeoffs have been below historic levels, but he said more chargeoffs could be in the offing next year. "A slower economy will drive some chargeoffs," he said.
A sizable increase in fee income helped Wachovia Corp. to its 17% rise in fourth-quarter operating income, $246 million.
Analysts praised the $65.3 billion-asset company's performance.
"We tend to think of Wachovia as the Cal Ripken of banking: it's a steady performer that doesn't necessarily hit a lot of home runs," said Mr. Mayo. "But the top-line growth in the fourth quarter shows they have some additional muscle."
Noninterest income of $326 million in the fourth quarter was up 25% increase over the year-earlier period. Fees from trust services, deposit accounts, mortgages, automated teller machines, and credit and debit cards drove the increase, the bank said. Proceeds of $17 million from branch sales also boosted noninterest income.
Capital markets activities contributed as well, providing profits of $36 million, a 125% increase over the year earlier quarter.
Loan growth and a better yield on interest-earning assets contributed to a nearly 10% increase in net interest income, to $610 million.
Average loans climbed by $4.2 billion, or 10%, to nearly $46 billion, while net yield on interest-bearing assets increased by 7 basis-points, to 4.28%.
Though banks are making more commercial loans, some analysts were skeptical about the terms being offered and the quality of the borrowers. Margins continue to be under pressure and some banks are showing an uptick in loan chargeoffs.
"For most banks, that's going to be the concern," Ms. Yates said. "What kind of commercial loans are you putting on to make up for the squeezed margins?"
While lending volume is up, the loans are yielding less income due to three cuts in the prime interest rate last year. "The bottom line is prime rate reductions are taking their toll."
Wachovia took a $7 million charge in the fourth quarter to clean up the last of the expenses related to its Virginia mergers.
In an interview Thursday, chief financial officer Robert S. McCoy Jr. said the Winston-Salem, N.C., banking company expects to report a second- quarter charge of roughly $15 million from the acquisition of the regional brokerage Interstate/Johnson Lane Inc. That deal, announced in October, is slated to close April 1.
Wachovia also posted a 10% rise, to nearly $84 million, in fourth- quarter loan losses. Mr. McCoy cited an expanding credit card portfolio and the need to write off some loans.
"With a $45 billion portfolio, we're obviously going to have some things come up," Mr. McCoy said. "But it's exactly in line with what I have told Wall Street." +++
Wachovia Corp. Winston-Salem, N.C. Dollar amounts in millions (except per share) Fourth Quarter 4Q98 4Q97 Net income $242.0 $4.0 Per share 1.17 0.02 ROA 1.48% 0.02% ROE 18.66% 0.30% Net interest margin 4.28% 4.21% Net interest income 621.0 569.0 Noninterest income 326.0 262.0 Noninterest expense 493.0 732.0 Loss provision 84.0 77.0 Net chargeoffs 84.0 76.0 Year to Date 1998 1997 Net income $874.0 $593.0 Per share 4.18 2.94 ROA 1.37% 1.03% ROE 16.92% 13.08% Net interest margin 4.24% 4.14% Net interest income 2,398.0 2,151.0
Noninterest income 1,249.0 1,007.0 Noninterest expense 1,996.0 1,967.0 Loss provision 299.0 265.0 Net chargeoffs 299.0 264.0 Balance Sheet 12/31/98 12/31/97 Assets $64,123.0 $65,397.0 Deposits 40,995.0 42,654.0 Loans 45,719.0 44,194.0 Reserve/nonp. loans 348.78% 538.50% Nonperf. loans/loans 0.34% 0.23% Nonperf. assets/assets 0.28% 0.20% Nonperf. assets/loans + OREO 0.40% 0.29% Leverage cap. ratio NA 9.24% Tier 1 cap. ratio 8.00%* 9.18% Tier 1+2 cap. ratio 11.40%* 12.10%
First Union Corp. Charlotte, N.C. Dollar amounts in millions (except per share) Fourth Quarter 4Q98 4Q97 Net income $857.0 $576.0 Per share 0.87 0.60 ROA 1.70% 1.47% ROE 22.59% 19.82% Net interest margin 3.63% 4.38% Net interest income 1,829.0 1,954.0 Noninterest income 1,777.0 1,165.0 Noninterest expense 2,522.0 1,137.0 Loss provision 167.0 445.0 Net chargeoffs 166.0 194.0 Year to Date 1998 1997 Net income $2,891.0 $2,709.0 Per share 2.95 2.80 ROA 1.66% 1.49% ROE 22.81% 20.24% Net interest margin 3.81% 4.53% Net interest income 7,394.0 7,893.0 Noninterest income 6,555.0 4,322.0 Noninterest expense 9,176.0 7,220.0 Loss provision 691.0 1,103.0 Net chargeoffs 638.0 872.0 Balance Sheet 12/31/98 12/31/97 Assets $237,363.0 $205,735.0 Deposits 142,467.0 137,077.0 Loans 133,557.0 129,840.0 Reserve/nonp. loans 246% 211% Nonperf. loans/loans 0.55% 0.67% Nonperf. assets/assets 0.36% 0.48% Nonperf. assets/loans + OREO 0.62% 0.75% Leverage cap. ratio 6.02%* 7.09% Tier 1 cap. ratio 6.86%* 8.43% Tier 1+2 cap. ratio 10.92%* 13.02%
National City Corp. Cleveland, Ohio Dollar amounts in millions (except per share) Fourth Quarter 4Q98 4Q97 Net income $291.3 $292.1 Per share 0.88 0.90 ROA 1.37% 1.59% ROE 15.74% 18.71% Net interest margin 4.00% 4.32% Net interest income 757.9 711.8 Noninterest income 625.6 536.0 Noninterest expense 871.5 765.2 Loss provision 56.9 52.9 Net chargeoffs 59.9 67.4 Year to Date 1998 1997 Net income $1,070.7 $1,122.2 Per share 3.22 3.42 ROA 1.34% 1.56% ROE 15.40% 18.20% Net interest margin 4.11% 4.37% Net interest income 2,951.0 2,853.3
Noninterest income 2,314.2 1,847.6 Noninterest expense 3,377.1 2,792.6 Loss provision 201.4 225.4 Net chargeoffs 200.5 222.7 Balance Sheet 12/31/98 12/31/97 Assets $88,246.0 $75,779.0 Deposits 58,247.0 52,617.0 Loans 57,041.0 51,053.0 Reserve/nonp. loans 445.88% 396.08% Nonperf. loans/loans 0.38% 0.47% Nonperf. assets/assets 0.28% 0.36% Nonperf. assets/loans + OREO 0.43% 0.53% Leverage cap. ratio 6.69% 7.49% Tier 1 cap. ratio 7.74% 8.91% Tier 1+2 cap. ratio 11.61% 13.12% ===