Kevin T. Timmons – ‘An OK quarter’

While the third quarter yielded no big surprises in bank earnings, banks find themselves in a position where they have to predict a future that is vastly different than what they believed it to be just two months ago.

In general, the reports pretty much came in where people had expected. I think almost everyone hit the analyst estimates. So, in that sense, it was an OK quarter, said Kevin T. Timmons, senior analyst at CL King & Assoc. in New York.

FleetBoston Financial reported a decline in earnings to $766 million in the third quarter of 2001 from $969 million in the third quarter last year. Capital markets earnings were also hard-hit with a decline of $239 million from last year.

These are certainly difficult times for our economy and corporate America, said Terrence Murray, chairman and chief executive officer of FleetBoston. An economic slowdown was well underway prior to Sept. 11 and has now worsened. For Fleet, the biggest impact has been seen in our capital markets businesses, which continued weak throughout the third quarter.

I think the underlying concern for the quarter and the next couple of quarters is how is the slide in the economy going to affect the banks in terms of non-performing assets and loan-loss provisions, said Timmons.

Non-performers were up in most banks but not to alarming levels, Timmons said. The banks have been in great shape over the past five years or so on the non-performing assets side of things. Even though there was deterioration, the absolute level of the numbers is still very good, he said.

But many banks continue to pad their loan-loss provisions for one reason. They’re spooked, said Timmons, about what’s going to happen over the next few months to a year. There’s no precedent and no way to confidently predict events.

Although major banks in the New York market were devastated by the Sept. 11 events, New England banks were pretty well insulated, said Timmons, including Fleet.

Total assets for Fleet declined to $202 billion from $218 billion last year, but Fleet said it was due to the sale/run off of low-margin assets in connection with a merger and the sale of the mortgage company. Non-performing assets were 1.22 percent of total assets, up 12 percent from the second quarter.

‘Loan Exposures’
Portland, Maine-based Banknorth Group, parent of First Massachusetts Bank, posted a surprising item in its third-quarter earnings, according to Timmons. Despite the overall trend toward increases, Banknorth’s non-performing loans and non-performing assets both declined over last quarter. Non-performing loans to total loans declined to 0.59 percent from 0.62 percent quarter to quarter while non-performing assets to total assets declined to 0.39 percent from 0.40 percent.

Banknorth recently received approval for its acquisition of Andover Bancorp and MetroWest Bank in the Bay State.

Their asset quality actually improved during the quarter, which came as a surprise, said Timmons.

We work very hard to put solid loans on the books. We emphasize loans to local companies and not loans outside our markets, the so-called shared national credits where our fate is not in our own hands. We also avoid concentrations in any segment or industry. Currently, we do not have any industry concentrations of 15 percent or greater in our commercial portfolios, said William J. Ryan, chairman, president and chief executive officer of Banknorth.

Timmons also credits the fact that the majority of the footprint for Banknorth lies in Northern New England, which is characterized by the no boom, no bust mentality.

Although asset quality is good in the New England area, banks will continue the loan loss reserve building many began in earnest during the second quarter.

Eastern Bank in Boston posted a 4.5 percent increase in net income for the first nine months of 2001 at $26.7 million, compared to the first nine months of 2000. Total assets increased 10.5 percent to $3.8 billion over last year.

Non-performing assets as a percentage of total assets was 0.12 percent compared to 0.13 percent at the end of the third quarter of last year, said Joseph J. Bartolotta, spokesman for Eastern.

While the economy has slowed, the overwhelming majority of our customers are still making their payments and, in fact, we’ve seen a slight improvement in this area, he said.

While all signs point to a slowing economy in the fourth quarter, we still expect to finish the year ahead of last year’s record earnings of $34.2 million. Our commercial banking division is going to have another strong year and our mortgage department is going gangbusters, thanks to the refinancing boom created by incredibly low interest rates, said Bartolotta.

The events of Sept. 11 will have a lasting impact on the banking industry, said Timmons. In terms of disaster planning, where natural disasters seemed the biggest worry before, there is a whole new dimension to risk.

Banks are going to reassess their exposure in terms of credit quality as well, he said. You want to look at your loan exposures to the airline industries, tourism, anything like that. I suppose now you even sit back and say, ‘Now do I have to think about exposure to companies that rely on the mail to conduct their business?’ Things that would seem ridiculous to have to worry about now potentially become issues, he said.

While the tourism industry will also be hard-hit, Timmons said initial reports from the more remote areas of New England like the Berkshires, Maine and Vermont have indicated steady business. People who would tend to take a European vacation may instead drive to a vacation spot, he said, bolstering such tourism-based areas.

Berkshire Hills Bancorp, the holding company for Berkshire Bank in Pittsfield, reported a slight increase in net income during the third quarter to $2.6 million from $2.5 million the year before. Total assets rose to $1.04 billion from $1.01 billion at the end of last year. Delinquencies in the auto and commercial loan portfolios were up and, as a result, loan loss provisions were increased as well.

The economy was heading south to a certain extent already. The attacks certainly accelerated that and if there are further attacks or even just the anthrax [incidents], that will add to costs and hurt a lot of companies and therefore [banks] have to try to assess whether they have to increase loan loss reserves, said Timmons.

Trying to figure out how to prepare for the coming economy is difficult to begin with, but the latest events have no precedent and therefore bankers are perplexed, he said.