ATLANTA -- Wider net interest margins, lower loan-loss provisions, and improved non-interest income helped banks in the Southeast chalk up their best first-quarter profits in three years.
Allied with this trend are indications of an economic recovery tentatively blooming in the Southeast. "There are signs of strength in the banks, and you often see that at a time when recovery is starting," said John W. Spiegel, chief financial officer at Atlanta-based SunTrust Banks Inc.
"I'd be surprised if we saw a major increase in problems from this point on," he added.
David Orr, chief economist at Charlotte, N.C.-based First Union Corp., said jobs, retail sales, housing permits, and personal income have been improving slowly in most southeastern states since last summer.
In February, retail sales were up 10.3% in Georgia from a year earlier. They rose 8.2% in Florida and 7.3% in North Carolina, compared with 4.4% for the nation as a whole.
Louisiana Seen Lagging
The Economic Forecasting Center at Atlanta-based Georgia State University predicts that the economies of Alabama, North Carolina, andd Tennessee will lead the region this year, with only Louisiana in danger of remaining mired in recession.
"There was an awful lot of momentum in the first quarter. If it just holds, it will be a nice year," Mr. Orr said. "The underlying economic current in the Southeast is moving ahead decently - enough to be helpful to bank earnings."
The 29 southeastern banks followed by Keefe, Bruyette & Woods Inc. posted a 14% median gain in first-quarter earnings per share from a year earlier and a 13% improvement from the fourth quarter of 1991.
Only the midwestern banks were more profitable, reporting a median 1.07% return on assets, compared with 1.03% in the Southeast.
Much of the improvement was fueled by the decline in interest rates, which lowered the cost of funds. The median expansion in net interest margin for banks in the Southeast was 27 basis points, the highest in the country, according to Shearson Lehman Brothers.
Deposits Cost Less
The departure of "irrational" competitors, mostly insolvent S&Ls seized by regulators, enabled banks to take full advantage of the interest rate decline by lowering the price they paid for deposits.
This trend was particularly pronounced in Florida, where numerous thrifts and one large bank (Miami-based Southeast Banking Corp.) have failed since the first quarter of 1991, leaving Barnett Banks Inc., Jacksonville; First Union; Charlotte, N.C-based NationsBank Corp.; and SunTrust controlling 68% of the state's bank deposits.
"We have four principal players now, which has really brought some rational pricing," said Charles W. Newman, Barnett's chief financial officer.
Barnett's margin, for example, gained 49 basis points to reach 5.04% from 4.55% a year earlier. Tampa-based First Florida Banks Inc., the second-largest independent bank left in the state, did even better: Its margin surged 63 basis points to 4.73%.
Most bankers and analysts expect margins to narrow later in the year, but they predict that a continuing decline in loan-loss provisions will give bank earnings another boost in the second half.
Lower loan-loss provisions are already helping many banks. First-quarter provisions declined 40% from a year earlier at Barnett, and were down 24% at Wachovia Corp., Winston-Salem, N.C., 20% at NationsBank, and 14% at First Union.
Also encouraging was a continuing, if slight, decline in newly classified bad loans. Typical was Wilson, N.C.-based BB&T Financial Corp., which reported that its nonperforming assets declined $5 million from the fourth quarter, its second consecutive decline.
The company's nonperforming assets at March 31 totaled $75.6 million, or 1.16% of total assets of $6.5 billion.
More Buyers for Real Estate
Banks also reported a renewed ability to sell off distressed real estate. "There was a period there in mid-1991 when it was very hard to deal with problems because there weren't any buyers," said John A. Allison, BB&T's chairman and chief executive officer.
"But there are clearly more buyers in the markeplace today. A number of people sense that the real estate market has at least bottomed," Mr. Allison said.
First Florida aggressively discounted repossessed properties, mostly lots zoned for development, to 55 to 60 cents on the dollar.
In this manner, it managed to unload $4.3 million from its $30 million portfolio of repossessed properties in the first quarter; the company has signed agreements to sell an additional $7.2 million according to Paul M. Homan, president and chief executive.
In the face of stagnant loan demand, many banks depended heavily on noninterest income to boost earnings, particularly securities gains. NationsBank led the way by earning $204 million from the sale of securities, which helped raise the company's net income to $310 million.
Bank South's Gain
Atlanta-based Bank South Corp. used $6.1 million in securities gains to report its first quarterly profit - $668,000 - since the year-ago quarter, when it earned $5.6 million.
Memphis-based First Tennessee National Corp., which has developed its investment banking operations into a profitable specialty, saw revenues from that division spurt 54.5% from last year's first quarter, to $18.9 million, contributing to an overall 34% gain in noninterest income.
Trust departments all across the South reported a surge in business related to the bullish stock market. SunTrust, which operates the region's second-largest trust operation after NationsBank, reported a 19% surge in trust profits, to $55.7 million.
One category of noninterest income that showed healthy gains at many banks was "deposit fees."
In part this related to higher fees charged consumers, but a major component turned out to be what bankers refer to as the "earnings credit rate' on commercial accounts: As interest rates drop, commercial customers lose the protection from service charges they receive on large deposits.
Loan demand, which had been sluggish last year, seemed to pick up in the first quarter, although the gains are scarcely measurable. "It's not necessarily good, but it's better than it was," said Mr. Allison of BB&T.