With the release of its first-quarter earnings report, FleetBoston proved that the merger of the former rivals Fleet and BankBoston was good for the bottom line. At the same time Sovereign Bancorp, the Pennsylvania bank buying 285 branches that Fleet is divesting, saw its earnings fall as the bank paid for part of the costly branch package.
FleetBoston’s earnings jump-ed to $957 million in the first quarter, from $661 million a year ago. Operating net income increased 28 percent, from $661 million to $808 million, excluding $149 million in expenses from the merger and the branch divestiture.
Fleet Chief Executive Officer Terrence Murray acknowledged there was some investor doubt about Fleet’s execution of the merger, following disappointing earnings from other big bank mergers, such as First Union and CoreStates, last year.
I assure you that we have watched these companies closely and learned a great deal about the pitfalls, Murray told shareholders in the company’s annual meeting last week.
FleetBoston had assets of $187.8 billion on March 31. The company’s diversified business lines will help it stay profitable in the future, said Jim Moynihan, senior vice president at Advest.
I think they’ll end up doing better than Wall Street expectations, Moynihan said. That diversified flow of income is going to stand them very well in the future.
Sovereign completed the first of three branch acquisitions on March 24 and will buy the remaining branches from Fleet on June 16 and July 21. The company reported operating earnings of $52.8 million in the first quarter, compared to $45.3 million at the end of March last year. However, that figure excluded $14.7 million in special charges that the bank took related to mergers and acquisitions. The figure also did not include the impact of early issuance of debt and equity instruments that the bank used to finance the acquisition of the Fleet divestiture package.
While first-quarter 2000 operating earnings exclude special charges, we believe that with the completion of the major acquisitions from FleetBoston and the creation of Sovereign Bank New England, Sovereign will be well-positioned for continued strong growth, said Chief Executive Officer Jay S. Sidhu.
Mergers and acquisitions are often pricey endeavors, undertaken for the promise of future gain. The bank’s net income, reduced for these special charges dropped to $37.7 million, down 16.7 percent from $45.3 million in the first quarter of 1999.
Their hope is that by extending into New England they’re going to have a nice stream of income in the future, Moynihan said. They are paying out of today’s earnings for the future.
In the first branch acquisition from Fleet, Sovereign gained $4 billion in deposits and loan balances of $3.4 billion. The new bank in the region will face a tough challenge to keep those small-business and retail customers, Moynihan said. However, Sovereign may benefit from the publicity around Fleet’s fees.
The acquisition boosted Sovereign’s commercial loan portfolio, which grew 111 percent from the year before. The bank’s commercial portfolio totaled $5.7 billion at the end of the first quarter, compared to $2.7 billion in the first quarter of 1999. The bank logged $450 million in commercial originations in the first quarter. With the increase, commercial loans came to represent 33 percent of Sovereign’s loan portfolio, compared to 23.5 percent a year ago.
The bank’s new capital markets group posted revenues of $3.7 million in the first quarter. Sovereign formed the group in early February to provide services traditionally not provided by thrift institutions, such as foreign exchange and derivative and hedging capabilities.
The highly leveraged bank liquidated some securities in the first quarter. As part of a plan to rely less upon wholesale borrowings and a leveraged investment portfolio, Sovereign reduced investment securities by $436 million and borrowings by $328 million. The bank has $35 billion in assets and 575 branches in the mid-Atlantic and New England.
On the Verge
Bank officials hope that a pending bank merger, between Peoples Heritage Financial Group and Banknorth, will equate to stronger earnings. The merger is expected to close in early May, pending regulatory approval. Peoples Heritage Chief Executive Officer William J. Ryan will head the merged company, which will take the Banknorth name.
Peoples’ net income surged in the first quarter, from $13.5 million a year ago to $39.3 million. In the same period Banknorth took a hit of 21 percent, as its net income dropped from $13.5 million to $10.6 million.
I think when you put Peoples Heritage and Banknorth together it’s going to be an outstanding combination, Moynihan said. When Bill Ryan gets the ball he really runs with it.
Peoples Heritage Financial Group had operating earnings of $40.4 million in the first quarter, up 11 percent from $37.6 million the year before. Taking into account merger-related charges in the first quarter of 1999 and branch closing costs in the first quarter of 2000, the bank reported earnings of $39.3 million in the first quarter of this year, compared to $13.5 million for the same period in 1999.
Most of the earnings growth came in the area of consumer and commercial lending, said Chairman, President and CEO Ryan. The company saw double-digit growth in those areas over the last quarter of 1999, although the bank historically has the slowest growth in those areas in the first quarter. The first three months of this year were different in part because of merger activity in Massachusetts, where Peoples Heritage operates Family/SIS Bank.
Market disruption in Massachusetts as a result of major mergers and divestitures was clearly a factor in our commercial and consumer loan growth, Ryan said.
The bank’s noninterest income rose 21 percent from the year before. Most of the income in this area came from fees from trust and investment services, insurance commissions, mortgage banking fees and other customer service fees.
The $13.8 billion-asset company operates Bank of New Hampshire and Glastonbury Bank & Trust in Connecticut. Peoples Heritage plans to close on the acquisition of Banknorth Group in early May.
Banknorth saw its earnings drop as its acquisition neared in the first quarter. The Burlington, Vt.-based bank saw its net income drop 21 percent in the first quarter to $10.6 million, compared to $13.5 million in 1999.
We expected the investment management fees would be up 10 percent, but the market had something to do with that, said executive vice president and chief financial officer Thomas J. Pruitt.
Assets under management at the Stratevest Group, the bank’s investment and asset management firm, increased just 3.1 percent.
Pruitt attributed other losses to low deposit growth and a drop in mortgage banking. In the first three months of 1999 the bank had heavy refinancing activity and logged $1.3 million in mortgage banking income. That figure dropped 48.7 percent in the first quarter of this year as interest rates rose and the bank collected $679,000 in mortgage banking income.
Compared to a year ago, our mortgage business was almost at the opposite end of the spectrum, Pruitt said.
He expects the business will pick up with the spring selling season.
Banknorth’s non-interest expenses increased 7.7 percent in the period to $39.2 million.
The company has assets of $4.6 billion. Banknorth is the holding company for First Massachusetts Bank and six other community banks in New England and New York.
