Fee income fueled strong gains in second-quarter profits at two major bank holding companies.
NationsBank Corp. and First Chicago NBD Corp. both exceeded analysts' expectations in the results they released Monday, with investments in brokerage, asset management, and other nontraditional business lines paying noticeable dividends.
NationsBank reported net income up 53%, to $1.4 billion, but that included a one-time gain on the sale of 67 Florida branches related to its acquisition of Barnett Banks Inc.
The Charlotte, N.C., company's operating income rose 23%, to $1.13 billion. Excluding the extraordinary gain, the $1.15 earnings per share beat analysts' estimates by a cent.
Analysts said NationsBank's report reflected the company's strengths in integrating large mergers, which augur well for its pending deal with BankAmerica Corp.
First Chicago's net jumped 8%, to $408 million. Its return of $1.38 per share, a seventh consecutive quarterly record, was 4 cents better than the consensus estimate.
Noninterest income was up 31% at each institution, hitting $1.86 billion at NationsBank and $842 million at First Chicago.
"That's an important factor to investors," said Frank Barkocy, an analyst with Josepthal & Co. "Companies could have more stable earnings as they are less vulnerable to interest rate risk."
"NationsBank's core operating performance trends continue to be quite positive," said chief executive officer Hugh L. McColl Jr. "We are particularly pleased with the growth in our fee-based businesses, such as investment banking and brokerage, which is lessening our dependence on spread income."
NationsBank, which has $308 billion of assets, said investment banking and brokerage fees were more than double second-quarter 1997 levels, reflecting the October 1997 acquisition of Montgomery Securities.
Investment banking fees increased by nearly 150%, to $377 million.
The investment banking and asset management businesses are "obviously benefiting from strong market conditions," said J.P. Morgan Securities analyst Catherine Murray. "But operating trends appear to be very strong."
Fees from credit cards and mortgage banking also gained while service charges on deposits accounted for $461 million in income.
Net interest income was up 4%, to $2.5 billion. Noninterest expenses rose 12%, primarily because of expenses related to the Montgomery acquisition, the company said.
As the anticipated October closing of the BankAmerica deal approaches, "we have added confidence that NationsBank will be able to better streamline the BankAmerica franchise," said Michael Mayo of Credit Suisse First Boston. "The bottom line is the Boatmen's (Bancshares) and Barnett acquisitions are going well."
NationsBank expects to send shareholders the documents to vote on the BankAmerica merger in the middle of next month. Shareholders are set to meet on Sept. 24.
In a conference call with analysts Monday, NationsBank chief financial officer James H. Hance Jr. said the company has retained 98% of Barnett's "most profitable" customers, and that deposits are "up slightly."
Expenses at Barnett were down 15% in the second quarter, Mr. Hance said, though that does not include the substantial severance payment and "transition" charges in eliminating 4,000 of Barnett's 19,000 full-time positions since September. Earnings at Barnett grew 3% in the second quarter, he said.
"Barnett is progressing as well as or better than any previous acquisition," Mr. Hance said. "We have a good chance to hit our financial targets."
First Chicago NBD
The $120 billion-asset, Chicago-based company said fee income, excluding credit card securitizations, grew 19%, to $614 million in the second quarter. That reflected strong results from credit cards, loan syndications, cash management, and consumer banking.
Service charges on accounts increased 25%, to $283 million. The company also reported gains in investment management fees and trading profits-an area that has been underperforming the past couple of years.
The improvements helped to offset a 6% decline in net interest income, to $898 million. Chief financial officer Robert Rosholt said relationships with commercial customers continued to be profitable as these customers made use of fee-based services.
Credit card revenue grew 13% in the quarter, to $234 million.
Operating expenses were $911 million, up 10%, due to incentive compensation and the acquisition of Detroit brokerage firm Roney & Co., First Chicago said.
Ms. Murray of J.P. Morgan said First Chicago will benefit from its planned merger with Banc One, set to close in the fourth quarter.
"Banc One is growing more rapidly than First Chicago," she said. "The challenge and the opportunity is to try to stimulate more growth from the First Chicago franchise."
First Chicago said it reduced its outstanding loans in Korea, Indonesia, and Thailand to $1 billion at the end of the second quarter, from $1.5 billion on Jan. 31. +++
NationsBank Corp. Charlotte, N.C. Dollar amounts in millions (except per share) Second Quarter 2Q98 2Q97 Net income $1,408.0 $919.0 Per share 1.43 0.94 ROA 1.81% 1.30% ROE 22.75% 15.68% Net interest margin 3.81% 4.05% Net interest income 2,563.0 2,472.0 Noninterest income 1,859.0 1,424.0 Noninterest expense 2,508.0 2,233.0 Loss provision 265.0 225.0 Net chargeoffs 276.0 220.0 Year to Date 1998 1997 Net income $1,905.0 $1,774.0 Per share 1.95 1.81 ROA 1.22% 1.26% ROE 15.64% 15.18% Net interest margin 3.81% 4.05% Net interest income 5,127.0 4,916.0 Noninterest income 3,635.0 2,745.0 Noninterest expense 4,960.0 4,458.0 Loss provision 530.0 447.0 Net chargeoffs 553.0 435.0 Balance Sheet 6/30/98 6/30/97 Assets $307,985.0 $284,286.0 Deposits 169,238.0 168,444.0 Loans 179,755.0 180,424.0 Reserve/nonp. loans 248.15% 253.11% Nonperf. loans/loans 0.72% 0.72% Nonperf. assets/assets 0.47% 0.53% Nonperf. assets/loans + OREO 0.80% 0.82% Leverage cap. ratio 6.21% 6.05% Tier 1 cap. ratio 7.30% 6.83% Tier 1+2 cap. ratio 11.77% 11.32%
First Chicago NBD Corp.
Chicago Dollar amounts in millions (except per share) Second Quarter 2Q98 2Q97 Net income $408.0 $378.0 Per share 1.38 1.20 ROA 1.40% 1.40% ROE 20.10% 18.10% Net interest margin 3.61% 4.12% Net interest income 898.0 951.0 Noninterest income 842.0 644.0 Noninterest expense 911.0 825.0 Loss provision 206.0 180.0 Net chargeoffs 206.0 180.0 Year to Date 1998 1997 Net income $791.0 $758.0 Per share 2.68 2.37 ROA 1.39% 1.43% ROE 20.00% 17.90% Net interest margin 3.64% 4.12% Net interest income 1,776.0 1,858.0 Noninterest income 1,581.0 1,323.0 Noninterest expense 1,759.0 1,625.0 Loss provision 385.0 367.0 Net chargeoffs 385.0 366.0 Balance Sheet 6/30/98 6/30/97 Assets $119,781.0 $112,595.0 Deposits 69,528.0 68,018.0 Loans 71,155.0 66,102.0 Reserve/nonp. loans 481% 428% Nonperf. loans/loans 0.40% 0.50% Nonperf. assets/assets 0.30% 0.30% Nonperf. assets/loans + OREO 0.40% 0.50% Leverage cap. ratio 7.70% 9.6% Tier 1 cap. ratio 7.70% 8.60% Tier 1+2 cap. ratio 11.10% 12.40% ===