Banks Bask in Wider Margins, Stronger Credit

ATLANTA -- Southeastern banks had a banner second quarter, brightened by continuing wide net interest margins, improving credit quality, and tight expense control. But sluggish loan demand suggests their profits could come under pressure later this year.

"Basically, we're not seeing strong loan demand," said John W. Woods, chairman and chief executive of AmSouth Bancorp., Birmingham. "If we don't see some loan demand over the next six months, I think we'll see some impact on earnings."

Taking a more optimistic view, banking analyst Susan R. Leadem said glimmers of improving loan demand in a few markets such as Florida and Georgia, combined with continuing high net interest margins, suggests "that the earnings for the latter half of the year are probably locked in at pretty high levels." Ms. Leadem is with the Robinson-Humphrey Co. in Atlanta.

AmSouth's 24% surge in net income, to $24.8 million, was typical of southeastern banks in the second quarter. The key contributor: Lower interest rates lifted AmSouth's net interest margin - the spread between loan yields and cost of funds - to 4.72%, up 40 basis points since the year-ago quarter and 18 basis points from the first quarter.

Earnings per Share Keep Rising

The 29 southeastern banks followed by Keefe, Bruyette & Woods Inc. posted a 39% median gain in second-quarter earnings per share from a year earlier - the best performance of any region - and a 9% improvement from first-quarter 1992.

"It's the same story as the first quarter: Distinctly lower loan-loss provisions with improving asset quality and a strong net interest margin," said Keefe Bruyette analyst Richard I. Stillinger.

Credit quality has unquestionably improved from the dark days of 1990 and 1991, when federal regulators pressured banks to add massively to their loan-loss reserves to guard against deteriorating real estate portfolios.

Nonperforming assets at AmSouth have declined for five consecutive quarters, ending June 30 at $111 million, or 1.97% of total assets, down 40% from their March 1991 peak.

The decline comes from an increased ability on the part of banks to sell off foreclosed property, usually by financing the sales themselves.

Finding Buyers

Although no broad-based, speculative market for distressed properties has yet developed, banks are able to find individual buyers with particular needs.

"There's not anybody out there with big money that wants to pay cash for most of these projects. But we are doing the financing on a pretty sound basis that allows us to get off nonperforming status," said AmSouth's Mr. Woods.

Many banks are now taking advantage of the heavy reserving they did in the previous two years to lower their loan-loss provisions.

The $48.1 million provision at Barnett Banks Inc., Jacksonville, was down 43% from the year-ago quarter. The provision at Memphis-based First Tennessee National Corp. fell 26%, to $10.4 million.

Atlanta-based SunTrust Banks Inc. decided to maintain roughly the same level of provisioning - $106.8 million in the first six months, compared with $107.3 million during the year-ago period.

The objective was to keep building its reserve, currently $410.5 million, or 112% of nonperforming loans, up from 87% in second-quarter '91.

"It's adding to loan-loss coverage, not covering for the first time, permitting a stronger, more conservative reserve," said chief financial officer John W. Spiegel

Tight expense control has been helping many southeastern banks. This assistance cannot be easily discerned from quarterly earnings reports, which usually show an increase in noninterest expense year to year because of acquisitions

Case in point: SunTrust's noninterest expense was up 10% to $334.6 million from the year-ago quarter because of higher bonuses paid in 1992 and the purchase of a bank in Florida. But SunTrust's head count, now 19,217, has declined by 1,000 in the past three years, Mr. Spiegel said.

On the debit side of the ledger, banks continue reporting sluggish loan demand, with some sustaining an actual decline in loans from the year-ago quarter: down 2.3% at NationsBank and 5% at Wachovia Corp., Winston-Salem, for example. Nashville-based J C. Bradford & Co. recently calculated that loan growth for southeastern banks is now at its lowest point since the mid-70s.

Money to Lend

"Unfortunately, we've got a lot of money to loan," said Jack W. Parker, chief financial officer at Union Planters Corp., Memphis. Union Planters' loans actually increased by 15%, to $2.3 billion, but only because of two thrift acquisitions.

Mr. Parker said loan demand was "very soft in the company's major markets, with commercial opportunities more encouraging than consumer.

NationsBank by contrast, reported more activity in consumer loans, but that growth was modest too. "I'd be hard pressed to say the economy is improving significantly," said chief credit officer Fredric J. Figge 2d.

The outlook on both counts appears promising: declining nonperformers should mean lower provisions, while interest rates show no signs of perking up anytime soon.

Robert T. Atwood, chief financial officer at First Union Corp., Charlotte, said he thought First Union's second-quarter margin of 4.88% might suffer a decline of five to 10 basis points through the rest of the year, "but not much more than that."

Margins for southeastern banks in June were generally higher than in April or May because of continuing declines in interest rates.

This improvement could be seen at Union Planters, which enjoyed a 4.56% margin in June, although lower May and April rates brought its quarterly average down to 4.33%.

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