Midwest Banks Lead Nation

Profits Jump in Quarter, but Loans Shrink

Midwest banks navigated a tough economy with aplomb during the third quarter, continuing their industry-leading performance on the strength of widening interest margins and firming credit quality.

But the region reported aggregate loan shrinkage for the first time in years. Though Keefe, Bruyette & Woods calculates the third-quarter loan contraction was a mild 0.5%, Midwest bankers still say it heralds a new competitive environment requiring significant strategy changes.

Increasing fee income has become a priority at many Midwest banking companies, even playing a major role in Society Corp.'s $1.2 billion planned buyout of Ameritrust Corp., which has a huge trust unit.

Only One Route

And a flat loan market has awakened many Midwest bankers to a realization that acquisitions and attendant cost-cutting are the only significant vehicles for augmenting earnings.

"There are too many banks and too few good assets, and if we really believe that, we ought to focus on condensing the infrastructure of our industry, which clearly has overcapacity," said Henry L. Meyer 3d, president of Society National Bank, Cleveland.

But the beauty of the Midwest consolidation lies in the fairly solid underpinnings of most participants. Even the weaker banks are commanding attractive purchase premiums.

The notable exceptions are in Chicago, whose two largest institutions have been limping.


In a plunge completely out of keeping with most other big Midwest banks, Continental Bank Corp. experienced a $185 million third-quarter loss. Revenues declined 16% since the second quarter even as problem assets soared by 26% to $973 million, or 7% of gross loans.

Continental has confined itself to commercial customers. The company is racing to cut costs faster than revenues. Analysts are guarded in their outlook; saying an upswing may not come until 1993.


First Chicago's $24.6 million in third-quarter earnings represents a 32% decline from the level in the period a year ago. What hurt results was a $35 million restructuring charge stemming from the elimination of 1,000 jobs in First Chicago's struggling global corporate bank.

The company's $167 million of net chargeoffs were up 15% from the second-quarter level and more than double those of the year-ago period. But the writeoffs facilitated an 8% reduction in nonperforming assets to $1.44 billion, or 5.6% of gross loans.

For the first nine months of 1991, First Chicago earned $131.4 million, representing a 0.33% annualized return on assets and a 5.7% return on equity.

Among the leading Midwest performers during the third quarter were Banc One Corp., Columbus, Ohio, and First Bank System and Norwest Corp., both of Minneapolis. Each of the three companies improved substantially on year-ago results.

And the factors sparking improved performance were similar: Lower deposit interest rates improved net interest margins; newly acquired portfolios and subsidiaries raised inventories of higher-yielding consumer loans, and credit quality was high.


Banc One's $133.9 million of net income was up 19.1% and represented a 1.73% annualized return on average assets and a 15.7% return on equity.

During the third quarter alone, the acquisitive company recorded a 6.56% increase in average commercial realty loans and an 8.79% increase in credit card loans. Average loans of $21.75 billion were up 11.9% from the level in the preceding year.

At Sept. 30, Banc One held $513 million of problem assets, a 5.3% increase since the second quarter and a 26.7% increase in a year. But problem assets made up only 2.21% of gross loans. And loss reserves of $401 million equaled 110% of nonperforming loans.


First Bank System's $50.2 million of third-quarter income represented a 41.8% increase. The company reported a 1.14% return on assets and a 16% return on equity during the period.

The company bought 18 thrift branches in Colorado and a $300 million credit card portfolio from a Maryland thrift during the third quarter. Consumer loans grew by 11.7%.

The company's 4.76% net interest margin during the third quarter compared with a 3.81% margin a year earlier.

First Bank said problem assets fell $13.2 million during the third quarter to $363.5 million, or 2.8% of gross loans. The bank at Sept. 30 held $351.2 million of loss reserves, equaling 127.2% of problem loans.


Norwest earned $104.1 million during the third quarter, a 22.2% increase from the level in the period a year ago. The company reported a 1.14% return on assets and an 18.9% return on common equity.

Key in the performance, Norwest said, was a quicker-than-expected reduction of problem assets at its subsidiary, United Banks of Colorado, which the company acquired in April.

During the third quarter alone, problem assets fell by $57.8 million, to $417.3 million, or 2.1% of gross loans. The company's $601.5 million of loss reserves at Sept. 30 equaled a muscular 205% of nonperforming loans.


Society Corp., Cleveland, also was among the Midwest frontrunners during the third quarter, as measured by its performance ratios. The company said profits rose 10% to a record $44.5 million, representing a 1.19% return on assets and a 16.53% return on equity.

The company attributed the results to a widened net interest margin and improving credit quality. In the third quarter, Society said, nonperforming assets fell by $21.3 million to $194.4 million, or 1.57% of gross loans.

Net chargeoffs of $63.8 million were up 2.5%, while the company's $58.6 million loss provision represented a drop of 4.4%.


PNC Financial Corp., Pittsburgh, also reported hefty year-over-year improvement in the third quarter, albeit on the strength of $92.7 million of gains stemming from the sale of four Ohio banks and a merchant processing unit. The company earned $107.3 million, up 92%.

PNC's third-quarter loss provision rose to $148.9 million, or 44%, since the second quarter. Net chargeoffs of $112.8 million were up 19% from the second quarter, but that facilitated the reduction of total problem assets by 2.5% to $1.18 billion, or 4.6% of gross loans.

The company cautioned that it would continue to be challenged by a "disappointingly slow economic recovery."


Mellon Bank Corp. rallied in the third quarter, raising income by 6.1%, to $70 million, while markedly slowing the rate of increase in total problem assets.

The company reported a 0.96% return on assets and a 14.74% return on equity during the period. Included in the results were $38 million in gains on the sale of investment securities.

At 3.05% of gross loans, Mellon's problem assets of $932 million were up $225 million from the level a year ago, but up only $25 million since June 30.


NBD Bancorp, Detroit, reported flat results for the third quarter. It showed $70 million of net income, up a scant 0.20%. The company said its earnings represented a 1.03% return on assets and a 14.13% return on equity.

NBD said revenue increases stemming from growth in earning assets, a widened net interest margin, and increased fee income were offset by a larger loan loss provision, higher salary expenses, and higher deposit insurance fees.

The company finished the third quarter with $287.2 million of problem assets that constituted 1.72% of gross loans. The company's $20 million loss provision was up from $16.3 million in 1990's third quarter.


In Cleveland, National City Corp. reported an 8% earnings decline, to $60.2 million. The company attributed the drop to a loan-loss provisoon of $46.7 million, up from $33.3 million.

National City said its results represented a 1.02% return on assets and a 12.68% return on equity. Both ratios were down from those a year ago.

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