B of A Posts Profit, but Stock Drops : Banking: Third-quarter earnings of $476 million are not enough to allay concerns about loan problems after Security Pacific merger.

BankAmerica Corp. reported strong third-quarter profit of $476 million on Thursday, but its stock dropped sharply because of concerns that its accounting after the April merger with Security Pacific masked deepening problems with California loans.

Separately, First Interstate Bancorp continued its turnaround by posting a profit of $75.1 million, or 82 cents a share, contrasted with a loss of $207.5 million, or $3.46 a share, in the year-earlier quarter. The company’s results were boosted by a 44% drop in problem loans and foreclosed real estate.

San Francisco-based BankAmerica, the nation’s second-largest banking company with assets of $186 billion, had net income of $1.22 a share for the three months ended Sept. 30, 3 cents above analysts’ projections. A year ago, BankAmerica reported net income of $285 million, but the numbers are not comparable because of its acquisition of Security Pacific.

The earnings were attributed in part to lower interest rates. The bank’s net interest margin--the spread between its cost of borrowing and its price of lending--jumped to 4.72% from 4.37% a year earlier. In addition, the company reaped $146 million from trading activities, largely related to the currency crisis in Europe.

“Earnings for the third quarter were solid, and the integration of Security Pacific’s operations into BankAmerica is proceeding on schedule,” BankAmerica Chairman Richard Rosenberg said in a statement.

Nonetheless, BankAmerica’s stock tumbled $2.25 a share Thursday to $41.75 on the New York Stock Exchange, where it was the most active issue, with 3.77 million shares changing hands.

Bank analysts said the drop reflected growing concerns about the deteriorating California economy. Particularly trouble some, they said, were a $600-million rise in the assets that BankAmerica intends to sell, to $5 billion, and an unexpectedly large, $800-million boost in “goodwill,” an intangible asset, that brought the total to $3.7 billion.

The shifts in troubled loans resulted in a decline in the value of non-performing loans--those on which interest is not accruing or being paid. That figure shrank to $4.2 billion from $4.6 billion as of June 30.

However, the rise in goodwill “spooked” investors who viewed it as evidence that BankAmerica has had to write down some of Security Pacific’s problem assets far more than expected to prepare them for resale, said Donald K. Crowley, an analyst with Keefe, Bruyette & Woods in San Francisco.

The bank’s report made it impossible to assess accurately how bad some of the loans were, analysts said. Under purchase accounting, used in such post-merger cases, a company can remove troubled assets from the balance sheet, making it difficult to analyze the credit quality.

“There is a sense that maybe the accounting was being pushed hard to present the best possible picture,” said John D. Leonard, an analyst with Salomon Bros., a New York investment firm. “Yes, the earnings are just fine . . . but what’s going on underneath here?”

George M. Salem, an analyst with Prudential Securities who has long been bearish on California real estate and banks, said purchase accounting “allows a company in a legal way to avoid having to take write-downs on bad loans.”

However, Frank N. Newman, BankAmerica’s chief financial officer, said there have been “no surprises at all” about the quality of Security Pacific’s loans. He said the bank still meets the highest federal standards for capital, the financial cushion banks maintain.

Troubled assets earmarked for sale have already been written down by 50% or more, he said, and the bank has set aside enough to cover 100% of potential loan losses.

“We haven’t looked at it with rose-colored glasses,” he said. “Southern California construction and real estate (are) clearly not doing well,” and the company will continue to monitor them.

In Los Angeles, First Interstate’s results were boosted by a sharp drop in problem loans, the result of an aggressive cleanup. The bank set aside $60 million for possible loan losses, compared to $246 million in the year-earlier quarter.

First Interstate repeated previous statements that it is considering teaming with its largest shareholder, the New York investment firm Kohlberg Kravis Roberts & Co., to make acquisitions.

Sources said the bank was not among the bidders for 13 small banks put up for sale by First City Bancorp of Texas, a company First Interstate has shown interest in.

Groves reported from San Francisco and Bates from Los Angeles.