Three large Eastern banks kicked off the third-quarter earnings season Tuesday by reporting solid profits, fueled by improved credit quality and tax-related gains. But weak loan demand and declining interest margins tempered the results.
Atlanta-based SunTrust Banks Inc. netted $120.3 million for the three months ending Sept. 30, a 13% boost over its year-earlier earnings. The gain, which translated to 96 cents a share, was in line with analysts' estimates.
SunTrust, which ended the quarter with $38.2 billion of assets, saw its shares rise 25 cents to $43.75 in afternoon trading Tuesday.
Florida's Barnett Banks Inc. earned $111.1 million in the quarter, or $1.06 a share, up 56% from the year-ago quarter. The Jacksonville-based company, which has $37.3 billion of assets, beat analysts' consensus estimates by 3 cents a share, largely because of better-then expected loan quality.
Barnett's stock fell 12.5 cents to $44.25 in late afternoon trading Tuesday.
Pittsburgh-based Mellon Bank Corp. reported earnings of $114 million, or $1.50 a share, well above analysts' consensus estimate of $1.35, as compiled by Zacks Investment Research.
Profits were driven by strong fee income from Mellon's new Boston Co. subsidiary and an unexpectedly large $5 million gain related to a new tax law.
Mellon's stock soared $3 a share in heavy trading Tuesday afternoon to $58.125.
Separately, First Empire State Corp., based in Buffalo, N.Y., said it earned $25.9 million for the three months ended Sept. 30, a 23.3% jump from the year-earlier quarter. The quarterly profit, which translated into $3.40 a common share, was expected by analysts.
Rising fee income and falling credit costs were countered by a third consecutive quarter of flat net-interest income and weak loan demand at the Georgia-based bank.
"We've seen some middle-market loan opportunities, but there's just not a steady enough flow to offset the payoffs," said James Armstrong, head of investor relations at Sun Trust.
Sun Trust's net interest margin fell to 4.76%, down 36 basis points from the year-ago quarter and 11 basis points from the second quarter.
Mr. Armstrong said that despite some "modest earning assets growth," the company has not been able to reinvest its maturing short-term securities at comparably high rates.
SunTrust's credit expenses, however, fell dramatically. Its loan-loss provision dropped 12% to $49.6 million from $56.3 million in the year-ago quarter, while net chargeoffs declined 26% to $21.4 million.
Noninterest income, driven by trust and mutual funds fees, gained 9% in the third quarter to $181.8 million from the comparable 1992 quarter.
Separately, SunTrust's board on Tuesday said it would repurchase up to 12 million shares of stock over an extended period of time.
Cost savings derived from the recent acquisition of First Florida Banks Inc. and reduced credit costs told the story behind Barnett's third-quarter gains.
The company's loan-loss provision was $23.8 million, down 65% from the the year-ago quarter and 21% from the second quarter. Net chargeoffs fell 57% from the 1992 period and 20.5% from the previous quarter to $27.4 million.
Noninterest expense of $368.4 million was down 8% from the year-ago quarter, as the company cut 3,000 jobs since announcing the First Florida acquisition late last year. The expense cuts occurred despite a a $5 million charge Barnett took during the quarter to settle a class-action lawsuit involving auto insurance.
Like SunTrust, Barnett experienced a continuing decline in its commercial realty and business loan portfolios.
"It's the same old story," said Susan Leadem, an analyst at Robinson-Humphrey Co. "The loan growth is all on the consumer side and commercial is still a struggle."
Barnett's net interest margin and net interest income also declined during the quarter.
"The main thing they've got to do is expand their earning assets," said analyst Benjamin C. Bishop Jr., nothing that Florida banks are no longer able to tap a booming commercial real estate market to pump up their loan balances.
MELLON BANK CORP.
Despite unexpectedly large gains from the tax law change, which allows the company to deduct its amortization of certain intangible assets, Mellon's earnings fell more than 26% from the year-earlier quarter's net income of $156 million.
Mellon attributed the previous year's gain to one-time securities sales and tax-loss benefits. Excluding the special gains and applying fully taxed rate, Mellon's earnings were 60% higher than in 1992's third quarter.
"The quarter was a pleasant surprise," said Ronald I. Mandle, an analyst at Sanford C. Bernstein. "Taxes had a lot to do with it, but core earnings were strong, especially fee income."
The higher-than-expected profits caused Livia S. Asher of Merrill Lynch & Co. to lift her 1993 estimate of Mellon's earnings to $427 million from $416 million and her 1994 projection to $511 million from $494 million.
"There are several factors going forward, including a lower tax rate, better margins, and good fee growth," she said.
Fee income during the third quarter rose 18% over the previous three months to $334 million. The Boston Co. contributed $105 million of the total during its first full quarter as a Mellon unit, including $92 million from trust and investment management fees.
Net interest revenue rose 8% from the second quarter to $340 million, reflecting a higher level of interest-earning assets from the Boston Co. and from the December 1991 purchase of branches and deposits of Meritor Savings Bank. However, a Mellon spokesman said loan demand remained flat during the quarter.
On the credit side, nonperforming assets were $394 million, down 44% from the year-earlier period. Mellon's net credit losses fell 30% from the second quarter to $28 million while its provision of $30 million was down $5 million from the previous quarter.
Staff expenses were up 20% from 1992 to $209 million, primarily reflecting the Boston Co. acquisition.
FIRST EMPIRE STATE CORP.
The company, which has $10.9 billion of assets, benefited from rising income related to its trust and mortgage businesses and a big drop in its loan chargeoffs to $5 million from $13.5 million in 1992's third quarter.
First Empire added $19.7 million to its provision for possible credit losses, despite the improvement in its chargeoff rate.
Mark Lynch, an analyst at Lehman Brothers who recently began following First Empire, said the company could have added $8.2 million more to its bottom line if its provision simply matched its chargeoff. Its allowance as a percentage of nonperforming loans rose to a very sturdy 219% from 188% three months earlier.Earnings at a Glance Percentage Third-quarter change from net income year-earlier (in millions) quarterBarnett $111.1 55.8%FirstEmpire 25.9 +23.3Mellon 114 -26.9*Sun-Trust 120.3 +12.9*Year-earlier quarter included $76million of securities gains as well astax-loss benefitsSunTrust Banks Inc.AtlantaDollar amounts in millions (except per share)Third Quarter 3Q93 3Q92Net income $120.3 $106.5Per share 0.96 0.83ROA 1.27% 1.21%ROE 16.44% 15.57%Net interest margin 4.76% 5.12%Net interest income 409.4 410.0Noninterest income 181.8 166.9Noninterest expense 346.9 351.2Loss provision 49.6 56.3Net chargeoffs 21.4 28.8 Year to Date 1993 1992Net income $354.5 $314.9Per share 2.80 2.43ROA 1.28% 1.20%ROE 16.57% 15.71%Net interest margin 4.87% 5.09%Net interest income 1,228.2 1,212.0Noninterest income 544.4 500.7Noninterest expense 1,054.5 1,045.3Loss provision 142.1 164.7Net chargeoffs 76.4 106.0 Balance Sheet 9/30/93 9/30/92Assets $38,189.0 $35,084.0Deposits 29,691.0 28,524.0Loans 24,720.0 22,674.0Reserve/nonp. loans 187.00% 123.00%Nonperf. loans/loans 1.19% 1.60%Nonperf. asset/asset 1.23% 1.72%Leverage cap. ratio NA 7.32%Tier 1 cap. ratio NA 9.41%Tier 1+2 cap. ratio NA 11.42%Barnett Banks Inc.Jacksonville, Fla.Dollar amounts in millions (except per share)Third Quarter 3Q93 3Q92Net income $111.1 $71.3Per share 1.06 0.69ROA 1.21% 0.76%ROE 16.09% 11.16%Net interest margin 5.09% 5.27%Net interest income 421.7 444.4Noninterest income 152.4 144.8Noninterest expense 368.4 402.5Loss provision 23.8 67.5Net chargeoffs 27.4 63.4 Year to Date 1993 1992Net income $307.7 $201.5Per share 2.93 1.95ROA 1.09% 0.71%ROE 15.26% 10.85%Net interest margin 5.10% 5.09%Net interest income 1,286.4 1,293.9Noninterest income 453.4 432.2Noninterest expense 1,141.7 1,220.7Loss provision 101.6 195.2Net chargeoffs 112.4 186.0 Balance Sheet 9/30/93 9/30/92Assets $37,337.0 $38,023.0Deposits 32,634.0 33,103.0Loans 25,911.0 26,213.0Reserve/nonp. loans 140.00% 103.00%Nonperf. loans/loans 1.49% 2.08%Nonperf. asset/asset 1.60% 2.56%Leverage cap. ratio 7.09% 6.32%Tier 1 cap. ratio NA NATier 1+2 cap. ratio NA NAMellon Bank Corp.PittsburghDollar amounts in millions (except per share)Third Quarter 3Q93 3Q92Net income $114.0 $156.0Per share 1.50 2.57ROA 1.24% 2.13%ROE 14.95% 30.37%Net interest margin 4.26% 4.59%Net interest income 340.0 295.0Noninterest income 334.0 287.0Noninterest expense 463.0 368.0Loss provision 30.0 40.0Net chargeoffs 28.0 61.0 Year to Date 1993 1992Net income $247.0 $332.0Per share 3.13 5.34ROA 0.96% 1.49%ROE 10.94% 22.20%Net interest margin 4.39% 4.39%Net interest income 976.0 862.0Noninterest income 934.0 738.0Noninterest expense 1,387.0 1,068.0Loss provision 100.0 100.0Net chargeoffs 117.0 194.0 Balance Sheet 9/30/93 9/30/92Assets $34,948.0 $29,190.0Deposits $26,305.0 $22,005.0Loans $23,464.0 $18,383.0Reserve/nonp. loans 2.51% 1.57%Nonperf. loans/loans 1.00% 1.91%Nonperf. asset/asset 1.13% 2.41%Leverage cap. ratio 6.90% 7.69%Tier 1 cap. ratio 7.90% 8.34%Tier 1+2 cap. ratio 11.70% 12.32%