Investments in cost control and noninterest income sources continue to pay off for First Bank System Inc., as the Minneapolis-based banking company reported second quarter earnings of $137.9 million, a 17.8% jump from a year earlier.
A 30.3% increase in credit card fees, combined with higher ATM transaction volume, improved mortgage banking results and a 1.8% decline in noninterest expense were key to the improved results, said Richard A. Zona, First Bank's vice chairman and chief financial officer.
"We expect the payment system business to be the driver of our earnings in the future," he said. "We think it will grow at a 20% to 25% rate over the next several years."
It is the mix of interest and noninterest income that makes First Bank a trendsetter for other Midwest banks, said Steve Schroll, an analyst with Piper Jaffray in Minneapolis.
"Fee income is going to be a very important part of this business going forward, because the spread business is getting commoditized and banks are getting disintermediated out of the business," he said.
Besides its investments in the payment systems business, he credited First Bank's ability to control expenses as another contributor to earnings.
Compared with increases in fee-based business, loans grew a modest 7.3% during the quarter, to $25.7 billion. But this relatively low growth rate masks increases in home equity, small business and credit card loans.
"They are trying to move away from the lower-margin businesses - corporate and mortgage lending - and toward home equity and credit cards which carry much higher margins," said Michael Durante, an analyst with McDonald & Co. in Cleveland.
Dain Bosworth Inc.'s Ben Crabtree said the company also added value by buying back 2.7 million shares. "I view First Bank as one of the few companies in the industry willing to look at buying back stock as an unemotional issue."
First of America Bank Corp. also reported higher noninterest income and lower operating expenses which helped it offset a 41 basis-point drop in net interest margin.
The Kalamazoo, Mich.-based company reported net income of $56.6 million, a 6.4% increase for the quarter.
However, the bank showed a 6.8% year-over-year decline in results for the first six months, reporting earnings of $104 million, or $1.64 a share. This was largely the result of a 39.6% increase in interest expense, compared with a 17.7% increase in interest income.
Columbus, Ohio-based Huntington Bancshares reported second quarter earnings of $58.2 million, up 8% over the first quarter, but 13.8% below the same period last year.
An 88 basis point drop in net interest margin was largely responsible for the decline.
The bank also suffered a drop - of 15.8% to $113 million - in its results for the first half.
Net income at Star Banc Corp. of Cincinnati jumped 18.4%, to $33.8 million, or $1.12 a share, partially as a result of an increase in the net interest margin.
David Moffett, Star Banc's chief financial officer, attributed the jump, which was up 17 basis points over the first quarter, to the replacement of low-yielding investment securities with higher yielding loans.
For the first six months, the bank reported net income of $66.5 million, or $2.21 a share, an 18% increase over last year.
Crosstown rival Provident Bancorp reported a 15% increase in net income for the quarter, to $16.5 million, or 90 cents a share. For the first six months, the company earned $31.5 million, or $1.72 a share.