Key, BankBoston Profits Up; U.S. Bancorp Slips

Expense tightening and increased fees figured in the earnings improvements of several major banking companies reporting Thursday.

Only U.S. Bancorp reported a loss-$47.6 million-due to merger-related expenses. But the former First Bank System Inc. would have posted a 12% gain were it not for the costs of its Aug. 1 combination with Portland, Ore.-based U.S. Bancorp.

KeyCorp, meanwhile, showed a 14% rise, to $236 million, mostly attributable to noninterest income and one-time gains. "Our strategies are on target and are benefiting customers and investors," said Robert W. Gillespie, chairman and chief executive officer.

At BankBoston Corp., earnings were up 181%, to $226 million, because of a one-time charge in last year's third quarter to cover the acquisition of BayBanks Inc. Without the special charge, BankBoston's profits were up 14%, highlighted by strong loan growth, especially in Latin America, and robust fee income.

KeyCorp

Cleveland-based KeyCorp, with $72 billion of assets, recorded a 36% increase in noninterest income, partially due to a $76 million gain from the sale of branches. Excluding the one-time gains, fee income was up $24 million.

Noninterest expense was up 5%, but netting out extraordinary items, expenses actually declined 3% from the same quarter last year.

KeyCorp completed its acquisitions of equipment leasing company Leasetec Corp. and subprime lender Champion Mortgage Co. during the third quarter. Gains from the branch sales were applied to the expenses of the acquisitions, the company said.

A major restructuring that KeyCorp announced last November is beginning to pay off, said analyst Fred Cummings of McDonald & Company Securities in Cleveland. "KeyCorp is delivering," said Mr. Cummings. "We're beginning to see the benefits of the restructuring."

KeyCorp's modest loan growth is partly attributable to its downsizing of branches, Mr. Cummings said, but it also is in line with an industry trend. With no growth or declines in deposits, companies must buy or borrow money to fund loans, which cuts into net interest income, the analyst said.

KeyCorp's earnings per share of $1.08 hit consensus estimates of analysts.

BankBoston

Earnings per share at the Boston-based institution of $1.47 were also in line with analysts' expectations.

"We have strong revenue growth opportunities in Latin America and in corporate banking that have allowed us to perform as we have and also continue to make investments," said Susannah M. Swihart, chief financial officer.

Analysts said they were pleased with $68.2 billion-asset BankBoston's revenue growth. Noninterest income rose 32%, to $448 million, on gains in corporate banking services, expansion in Latin America, and the sale of a mortgage unit earlier this year.

"It was a good, solid quarter," said Judah Kraushaar, an analyst at Merrill Lynch & Co. "One issue for banks is top-line growth. BankBoston ranks above many of its peers" in the revenue measure.

BankBoston's capital markets group was an important contributor, analysts said. Profits from equity and mezzanine investments jumped 19%, to $61 million. Fees from financial services soared 20%, to $168 million.

"We are beginning to see the pay-off for their investment in capital markets," said Lawrence Cohn, an analyst at Ryan Beck & Co. "That's clearly where their strength was during the quarter."

BankBoston also recorded a $68 million gain on the August sale of Fidelity Acceptance Corp., a subprime consumer lending unit, to Norwest Corp. of Minneapolis.

Without Fidelity Acceptance on its books, BankBoston's portfolio of domestic loans shrank 4%, to $31.2 billion. But loans in Latin America grew 19%, to $11 billion.

Net interest income dipped 3%, to $571 million, and the net interest margin contracted to 3.96%, from 4.40% last year.

Expenses dropped 15%, to $601 million, reflecting the full integration of BayBanks, the BankBoston said.

U.S. Bancorp

The $70 billion-asset U.S. Bancorp was affected by $440 million of merger-related charges and a $112 million increase in its loan-loss provision, also related to the merger. "Our integration and conversion efforts are progressing on schedule while our day-to-day business continues to grow," said U.S. Bancorp chairman and chief executive officer John F. Grundhofer.

The Minneapolis-based company reported increases in credit card, trust, and deposit service charges, pushing up total fee income by 12%. Net interest income rose 1%. Excluding merger charges, noninterest expense decreased 3%.

"They had an outstanding quarter," said Anthony Davis, an analyst with SBC Warburg Dillon Read & Co. "I was blown away by their expense management, and they're on track with their merger."

The largest merger expense was $232 million for severance and retention. Other costs included equipment and computer writeoffs and investment banking fees.

The company said it plans to take another $190 million in merger-related charges over the next four quarters. Analysts said the merger charges are in line with expectations.

U.S. Bancorp said it would merge computer systems for credit card operations this month and that trust and banking systems would be converted by the second quarter next year. +++

BankBoston Corp. Boston Dollar amounts in millions (except per share) Third Quarter 3Q97 3Q96 Net income $225.7 $80.0 Per share 1.47 0.45 ROA 1.36% 0.53% ROE 21.11% 6.61% Net interest margin 3.96% 4.40% Net interest income 571.1 591.4 Noninterest income 448.2 336.5 Noninterest expense 601.3 712.4 Loss provision 40.0 57.0 Net chargeoffs 60.9 54.8 Year to Date 1997 1996 Net income $644.5 $448.6 Per share 4.07 2.69 ROA 1.34% 1.02% ROE 19.56% 13.35% Net interest margin 4.27% 4.40% Net interest income 1,807.0 1,728.4 Noninterest income 1,154.7 1,004.6 Noninterest expense 1,723.4 1,771.6 Loss provision 160.0 171.0 Net chargeoffs 219.5 154.7 Balance Sheet 9/30/97 9/30/96 Assets $68,230.0 $61,963.0 Deposits 44,655.0 43,328.0 Loans 42,461.0 42,053.0 Reserve/nonp. loans 216% 202% Nonperf. loans/loans 0.80% 1.10% Nonperf. assets/assets 0.60% 0.80% Nonperf. assets/loans + OREO 0.90% 1.20% Leverage cap. ratio 7.20%* 7.20% Tier 1 cap. ratio 7.80%* 8.30% Tier 1+2 cap. ratio 11.70%* 12.70%

*Estimated

KeyCorp Cleveland Dollar amounts in millions (except per share) Third Quarter 3Q97 3Q96 Net income $236.0 $207.0 Per share 1.08 0.90 ROA 1.34% 1.28% ROE 19.41% 16.73% Net interest margin 4.58% 4.82% Net interest income 715.0 696.0 Noninterest income 393.0 289.0 Noninterest expense 648.0 615.0 Loss provision 102.0 49.0 Net chargeoffs 85.0 49.0 Year to Date 1997 1996 Net income $671.0 $632.0 Per share 3.06 2.70 ROA 1.32% 1.30% ROE 18.78% 16.76% Net interest margin 4.67% 4.78% Net interest income 2,122.0 2,072.0 Noninterest income 940.0 802.0 Noninterest expense 1,805.0 1,764.0 Loss provision 244.0 140.0 Net chargeoffs 217.0 138.0 Balance Sheet 9/30/97 9/30/96 Assets $72,077.0 $65,356.0 Deposits 43,870.0 44,523.0 Loans 53,676.0 48,373.0 Reserve/nonp. loans 247.25% 252.91% Nonperf. loans/loans 0.68% 0.71% Nonperf. assets/assets 0.57% 0.61% Nonperf. assets/loans + OREO 0.77% 0.82% Leverage cap. ratio 6.35%* 6.38% Tier 1 cap. ratio 6.88%* 7.49% Tier 1+2 cap. ratio 11.31%* 12.50%

*Estimated

U.S. Bancorp Minneapolis Dollar amounts in millions (except per share) Third Quarter 3Q97 3Q96 Net income ($47.6) $255.7 Per share (0.20) 0.98 ROA 1.88% 1.70% ROE 22.30% 19.70% Net interest margin 5.03% 5.05% Net interest income 779.8 770.0 Noninterest income 409.7 361.0 Noninterest expense 1,003.1 642.3 Loss provision 185.0 73.1 Net chargeoffs 164.5 69.9 Year to Date 1997 1996 Net income $549.6 $926.6 Per share 2.16 3.55 ROA 1.80% 1.69% ROE 21.50% 19.70% Net interest margin 5.05% 5.03% Net interest income 2,321.3 2,256.6 Noninterest income 1,194.7 1,422.3 Noninterest expense 2,168.1 1,951.2 Loss provision 370.3 195.7 Net chargeoffs 346.4 190.3 Balance Sheet 9/30/97 9/30/96 Assets $70,174.0 $70,056.0 Deposits 48,374.0 49,571.0 Loans 54,143 51,792.0 Reserve/nonp. loans 343% 357% Nonperf. loans/loans 0.55% 0.53% Nonperf. assets/assets 0.48% 0.49% Nonperf. assets/loans + OREO 0.62% 0.66% Leverage cap. ratio 7.30% 6.90% Tier 1 cap. ratio 7.00% 7.10% Tier 1+2 cap. ratio 11.10% 11.30% ===

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