Monday’s third-quarter profit reports generally matched expectations, but credit-quality concerns continued to mount as five banking companies, led by Bank of America Corp., reported rising nonperforming assets from corporate lending activities.

For the most part, analysts said, banking companies have offset the effects of shrinking profits on lending and a rise in potentially problem loans by boosting fees from consumer and corporate banking activities and cutting costs.

Bank of America, of Charlotte, N.C., said that third-quarter profits fell 15%, to $1.8 billion, because of charges associated with a previously announced restructuring. In July the company announced plans to fire 10,000 workers, many of them middle and senior managers, to cut bureaucracy. That initiative resulted in $346 million in charges during the quarter. Excluding the charge, earnings per share of $1.31 beat the consensus estimate of Wall Street analysts by a penny.

The company said nonperforming assets rose 13% from the second quarter, to $4.40 billion, two-thirds of the gain coming from a handful of large syndicated credits. “Bank of America in the third quarter faced the same head wind of higher interest rates and a slowing economy as other banks,” said Hugh McColl Jr., its chairman, in a prepared statement.

Cleveland-based National City Corp. said net income fell 7.2%, to $330.7 million, reflecting the effects of a balance-sheet restructuring that was initiated earlier this year. Earnings per share of 54 cents missed consensus estimates by a penny.

Fifth Third Bancorp in Cincinnati said profits rose 17%, to $228 million, on double-digit gains in processing and deposit fees. Earnings per share of 48 cents were in line with Wall Street estimates.

The midwestern banking companies reported slight rises in nonperforming assets.

Analysts said they were most surprised by evidence of rising nonperforming assets at Bank of New York Co. and Northern Trust Corp., which have long exhibited steady gains in profits from processing and investment management services.

Bank of New York’s profits fell to $363 million, from $773 million in the same period last year, which included a big gain from the sale of a lending operation. Northern Trust’s profits rose 18%, to $123.3 million.


Responding to market rumors that have battered the stocks of a number of brokerage and banking companies in the last few days, James Hance, Bank of America’s chief financial officer, said the company did not have material losses from high-yield bond trading or from loans or bonds underwritten for telecommunications firms.

The $671.7 billion-asset company did report a pretax loss of $257 because of a deterioration in the value of its automobile leasing residual portfolio. The loss was recorded as part of net interest income and of noninterest income.

Net interest margin narrowed to 3.12%, from 3.26% in the second quarter.

Mr. Hance said the company showed solid revenue gains from its four major business lines even though it is only about halfway through its restructuring initiative.

Net interest was nearly flat, at $4.67 billion, and noninterest income declined 2.2%, to $3.6 billion, largely reflecting the restated auto lease residual portfolio. Fees from credit card operations rose 7%, to $594 million, and the company attributed the gains to successful promotional efforts. Fees from investment services and brokerage rose 13%, to $471 million.

Investment banking income rose 4%, to $376 million, and trading account profits rose 19%, to $372 million, reflecting growth in equity-related trading activity, the company said.

The company also posted gains of 24% in private equity investing, including venture capital gains of $224 million and gains from investments in upstart technology projects of $153 million.

Assets under management rose 20%, to $275 billion. The company said its own funds, the Nations Funds, topped $100 billion of assets during the quarter.

Still, analysts said Mr. Hance’s outlook for credit quality has raised some alarm bells. Mr. Hance said during the conference call with analysts that he expects nonperforming assets to rise for the fourth quarter and for the first quarter next year but added that the company was “comfortable” with its projections.

“Everyone is hypersensitive to the issue right now,” said Diane Glossman, an analyst at UBS Warburg. “They are not saying anything outside their guidance, but the [increase in nonperforming assets] is going the wrong way.”

Bank of America shares fell $1.375, to close at $45.1875.


The $85 billion-asset company spent the last two quarters selling off $7.3 billion in assets in order to restructure its balance sheet. The result was a 10-point boost to the net interest margin, which reached 3.90% in the quarter. But analysts said the move hurt overall revenue growth.

Revenues declined 6% from the second quarter, to $1.34 billion, and 4% from the third quarter of last year.

“The balance-sheet restructuring has hit them with full force in this quarter,” said Joseph Duwan, of Keefe, Bruyette & Woods. “This is clearly a transitional year for National City,” he added.

Net chargeoffs hit 0.45%, up from 0.38% in the same quarter of last year. Nonperforming assets jumped 8% from the second quarter to $365 million. The provision for loan losses was also up, by 25%, to $70.4 million. Analysts also said some of the company’s fee businesses had weak showings despite a 13% gain in fee income, to $618.4 million.

Trust fees, for example, fell 2% from last year’s third quarter, to $79.8 million. Expenses rose 11.2%, to $785.9 million. National City shares fell 12.5 cents, to close at $20.625.


Earnings per share of 49 cents met the consensus of analysts.

Last year’s third quarter included a pretax gain of $1.02 billion from the sale of BNY Financial Corp., the company’s asset-based lending unit, and a $124 million liquidity charge on loans available for sale.

Excluding the gains from last year, revenues from fees rose 24%, to $785 million, and made up 62% of total revenue. Fee revenue from securities servicing rose 37% in the third quarter, to $427 million.

“Everything came in as expected. Revenue continues to be driven by its servicing fees, particularly securities processing, and that’s been the story over a consistent basis,” said Chris Bamman, a bank analyst at Advest Inc.

The $75.4 billion-asset company’s numbers are “a very strong affirmation of their positioning as a real leader in the securities processing business,” said Susan Roth, a bank analyst at Credit Suisse First Boston.

Nonperforming assets rose slightly from the second quarter, to $168 million from $162 million, in part because of a loan to an insurance company, the bank said.

Bank of New York has taken steps to lower its risk, exiting asset-based lending and growing to become a giant in the custody business. Foreign exchange and other trading revenues rose 31%, to $59 million. Private client services and asset management fees rose 26%, to $77 million. Fees from cash servicing dropped 6%, to $65 million. Trade finance revenues were also down, the company said, primarily because of the sale of BNY Financial and the improved risk profiles of certain Asian and Latin American markets.

Service charges and fees were up 9%, to $84 million, from the same period a year ago. They were down 19% from the second quarter, however, a decline the company attributed to a reduction in capital markets activity.

Expenses rose 23%, to $635 million, primarily due to acquisitions, technology investment, and new business, the company said.

Bank of New York shares rose $2.1875, to close at $53.3125.


Revenues rose 8%, to $649 million. The $44.3 billion-asset company attributed some of the gain to a 5.8% jump in net interest income, to $1.167 billion; a 32% gain in fees from data processing, to $129.6 million; and a 36% increase in consumer service fees, to $104.8 million.

“Our earnings this quarter were highlighted by accelerating revenue growth across nearly all business lines, a stabilizing net interest margin, good expense trends, and stable credit quality,” said George A. Schaefer, Fifth Third’s chief executive officer, in a press statement.

Nonperforming assets rose 4% from the second quarter, to $82.1 million, but net chargeoffs were down 3 basis points, to 0.27%. Analysts said the company seemed to be managing the higher-interest rate environment better than some other institutions. Fifth Third benefited from strong deposit growth. Average deposits were up 8.5% from last year’s third quarter, to $25.5 billion. Assets were up 7.1%, to $44.4 billion.

“We’ve had better deposit growth than others in the industry, heavily weighted towards checking and savings accounts,” said chief financial officer Neal Arnold. “We feel like we’re back to our kind of performance, while the industry certainly appears to be going through a lot more turbulence.”

Fifth Third shares rose $1.1875, to close at $54.


Earnings per share of 53 cents met with analysts’ estimates. Chicago-based Northern Trust has $34.5 billion of assets.

Fee revenue rose 28%, to $391.9 million, and made up 71% of total revenue. Trust fees grew 26%, to $304.7 million, and represented 55% of total revenue for the quarter. Foreign exchange trading profits rose 51%, to $37.6 million, but dropped from $42.1 million in the second quarter.

Net interest income rose 13%, to $157.1 million, in part due to 11% growth in average earnings assets. The company reported that nonperforming assets rose to $78.8 million, from $55.4 million in the second quarter, largely the result of a $24 million participation in a souring $1.8 billion loan made to Owens Corning, a Toledo, Ohio.-based insulation maker that filed for bankruptcy protection on Oct. 5 due to its multibillion-dollar asbestos liability.

Ms. Roth of Credit Suisse First Boston said she will adjust her earnings expectations, anticipating that Northern Trust will have to digest at least $12 million in additional losses in the fourth quarter and the first quarter of 2001.

Trust assets under administration rose 22%, to $1.7 trillion. Assets under management increased 29%, to $338 billion.

Expenses rose 25% to $344.9 million.

Northern Trust shares were unchanged, closing at $75.6875.

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