A batch of the nation's biggest banking companies reported mostly sunny second-quarter results Wednesday, and for the most part quelled fears that loan losses would rise sharply.

First Union Corp., the sixth-largest U.S. banking company, reported net income of $873 million and operating income that beat analysts' expectations by a penny. While Wall Street is far from ready to give the Charlotte, N.C.-based company a clean bill of health, analysts said the worst of First Union's acquisition and restructuring costs may be behind it.

The only disturbance came from No. 19-ranked State Street Corp. The Boston-based company acknowledged that its reported earnings per share of 75 cents, which matched consensus expectations, were actually closer to 71 cents. Analysts said one-time gains from the sale of a business made profits appear greater than they actually were. (See story at left.)

At Fleet Financial Group, which is preparing to merge with BankBoston Corp. in the fourth quarter, profits rose 15%, to $450 million, primarily on gains from fee-based revenue.

Nancy Bush of Ryan, Beck & Co. called Fleet's performance "remarkably serene," a description apt for most of the industry's results thus far.

"We're seeing a lot of margin improvement this quarter," said Lori Appelbaum, an analyst with Goldman, Sachs & Co. "Banks have lowered deposit rates and increased loan rates. Some have also refinanced some of their debt to lower costs."

"I've been pleasantly surprised," said Katrina Blecher of Brown Brothers Harriman & Co. While banks have experienced some problems with commercial loans, "the deterioration is not as bad as I originally anticipated," she said.

First Union reported operating earnings of 90 cents per share.

A 4% decline in capital markets income, to $380 million, offset gains in asset management. A drop in venture capital gains from equity investments accounted for the bulk of the falloff.

"The nature of capital market revenue is volatility," Ms. Blecher said. "That number will continue to bounce around."

On the plus side, capital management fee income gained 16% in the quarter, to $363 million, as the bank benefited from its selection of investment products.

"Capital management has been a steady growth item," said David West, a bank analyst at Davenport & Co. in Richmond, Va.

First Union will get further help in this area from its April agreement to buy Everen Capital Corp., a Chicago securities firm, he added.

The $230 billion-asset First Union has tamped down earnings expectations several times over the past year, most recently in May. At that time, the company said its purchase of CoreStates Financial Corp. would not yield the expected revenues, and expenses would climb because of the costs of developing its Internet bank, reorganizing its branch system, and buying Everen.

Analysts said First Union is making progress in those areas. "Apparently the worst of the customer attrition related to CoreStates and the Future Bank initiative is behind us," said Catherine Murray, a bank analyst at J.P. Morgan Securities.

Adjusted for expenses related to last year's purchase of Money Store, a subprime lender, First Union's expenses grew only 1% in the second quarter from a year ago. And expense growth for the year as a whole are on target for only a 3% increase, the company said in a statement.

But analysts are continuing to view First Union with caution. "The market has a 'prove it to me' attitude," said Mr. West. "The question remains as to whether they can continue to generate revenue growth. If they can get the CoreStates and Money Store problems behind them, they should be able to get earnings in a positive direction."

He and others said First Union is likely to achieve its operating earnings per share target of between $3.40 and $3.50 for the full year.

Shares in First Union ended Wednesday's trading at $46.5625, down 12.5 cents

Fleet Financial Group

Earnings per share of 75 cents at Boston-based Fleet beat analysts' expectations by a penny.

Acquisitions over the last two years have paid off in revenue growth, the company said. Fee revenues made up half of total revenues for the first time, climbing 28% to just over $1 billion.

"We are a much more diversified company now, with better balance and better growth prospects," said Eugene McQuade, Fleet's chief financial officer.

As at other regional banking companies, nonperforming assets ticked up from the first quarter, to $318 million. But they were down by $19 million from last year's second quarter.

Analysts said they were not concerned with asset quality at Fleet, which like many banking companies has enjoyed unusually low levels of nonperforming assets recently. "Their deterioration was mild compared to some other banks," Ms. Blecher said.

"To panic and sell a bank stock because of nonperformers may be premature," said Gerard Cassidy, an analyst at Tucker Cleary, Portland, Maine. "Do I think the recent upticks are the start of a trend? No."

The $107 billion-asset company plans to sell its entire Massachusetts branch network in connection with its $16 billion acquisition of BankBoston.

But the Massachusetts divestiture is only part of the package. Fleet proposes to put a total of $12.5 billion of deposits and 292 branches on the block to allay antitrust concerns.

Mr. McQuade said Wednesday that the bidding process has narrowed considerably, from dozens of applications to a "handful" of bidders who have been invited to do due diligence. Mr. McQuade said the banking companies expect to have a deal on the divestitures by mid-August.

Meanwhile, Fleet's businesses continue to "knock the ball out of the park," Mr. Cassidy said.

Investment services fees, which include the Quick & Reilly Group brokerage and clearing services acquired by Fleet last year, rose 20%, to $264 million. At Quick & Reilly alone, profits doubled to $50 million.

Capital markets revenues skyrocketed 72%, to $184 million. Credit card revenues-also bolstered by portfolio acquisitions last year-jumped 67%, to $164 million.

Expenses rose 16%, to $1.17 billion.

Shares in Fleet ended Wednesday up 18.75 cents, at $42.125.

U.S. Bancorp

Fee income from brokerage activities and deposit accounts lifted net income at U.S. Bancorp 17%, to $374 million.

The Minneapolis company reported earnings per share of 51 cents, a penny below Wall Street estimates. Analysts attributed the miss to higher-than- expected expenses at U.S. Bancorp Piper Jaffray, the company's brokerage subsidiary.

Noninterest expenses increased 11%, to $738 million, due in large part to growth in investment banking activities. Salaries, employee benefits, and other personnel costs increased 14%, to $430 million.

"Spending at Piper was a little higher than we thought it would be," said Goldman Sachs' Ms. Appelbaum.

In addition, the $77.4 billion-asset banking company paid $3 million to the Minnesota attorney general to settle a customer privacy lawsuit. (See related story on page one.)

But income from Piper Jaffray helped overcome these expenses to provide a significant boost to U.S. Bancorp's bottom line. Fees from brokerage operations played a significant role in increasing overall noninterest income by $95 million, or 17%, to $656 million.

Piper Jaffray also helped boost investment products fees and commissions, trading account profits, and investment banking revenue.

In addition, service charges on deposit accounts jumped more than 8%, to $108 million, compared with the year-earlier period.

"While the Street would have liked to see the bank meet consensus, the disappointment was not on the revenue side," said Joseph Duwan, an analyst with Keefe, Bruyette & Woods. "Revenue momentum has accelerated."

Efficiency at U.S. Bancorp improved significantly during the quarter. The ratio of expenses to revenues dropped to 42.4%, from 45.1% in the same quarter a year ago. Net interest income climbed nearly 6%, to $45 million.

But net chargeoffs were also up 21%, to $140 million, because of an expected jump in losses on several consumer loan portfolios purchased last year and on higher consumer fraud losses.

Shares in U.S. Bancorp closed Wednesday at $32.625, down $1.125.

Wachovia Corp.

Net income at Wachovia, the 16th-largest U.S. banking company, rose 18%, to $248 million. Earnings per share of $1.22 perfectly matched Wall Street expectations.

Operating earnings at the Winston-Salem, N.C.-based company jumped 10% to $253 million.

Two-thirds of the company's 13% gain in revenue came from fee-income sources, as the company integrated its April purchase of Interstate/Johnson Lane, a Charlotte, N.C. securities firm. Trust services and credit cards helped spark the fee increase.

"Wachovia is going after wealth management in a very total sense- investments, insurance, and advisory services," Davenport & Co.'s Mr. West said. "They feel they have the potential to get into a bigger share of wallet participation in affluent client areas."

The $67 billion-asset company did suffer from a 65% surge in nonperforming loans during the second quarter, to $209.6 million from $127.4 million. However, that stain resulted from just a few bad credits, analysts said. In particular, they cited a loan to Loewen Group Inc., a Canadian funeral services company that is in bankruptcy proceedings.

"Their credit losses are nothing out of the ordinary-nothing to get concerned about," Mr. West said. "They have a great loan-loss reserve. That gives them great earnings flexibility."

Allowances for loan losses were 2.6 times nonperforming loans at the end of the second quarter, down from 4.3 times a year earlier.

Overall, Wachovia's outlook is rosy, analysts said. "I think they will continue to show their true colors, bringing quality numbers at a good rate of growth," said Brown Brothers' Ms. Blecher. She forecast per-share earnings of $5 for 1999 as a whole.

Wachovia shares closed Wednesday's trading at $80.25, up 18.75 cents.

State Street Corp.

Net income rose 12.8% to $123 million at Boston-based State Street, as fees from securities processing and asset management demonstrated predictable double-digit growth.

The performance failed to impress Wall Street, however. Analysts said $12 million in one-time gains during the quarter clouded results.

Most of the gain-$10 million-came from the sale last month of a retained-assets services business to Bisys Group Inc.

Analysts said the $53 billion-asset banking company was also having difficulty keeping its rate of expense growth in line with revenues. Expenses grew 16%, to $1.1 billion, while revenues grew 15%, to $1.5 billion.

Responding to sharp criticism from Wall Street that sent its stock plummeting Wednesday, State Street defended its performance. "We had strong growth in all of our core businesses," said Ronald L. O'Kelley, chief financial office. "There has been a lot of misinformation. We are still growing."

Mr. O'Kelley added that a 4 cent per share difference between reported and operating results was "insignificant."

"I'm a bit baffled by the reaction" of Wall Street, he said.

Analysts, however, said they saw strong indications that State Street's revenue growth will slow sharply in the next two quarters.

One factor is that economic recovery in the overseas markets State Street has pinpointed for growth has not been robust. Another is that new business will be more difficult to attract as companies and institutions shy away from switching fiduciaries to avoid year-2000 computer problems.

"As a result of the anticipated revenue deceleration, they will have to focus more attention on expense growth," said Mr. Cassidy of Tucker Cleary.

Mr. O'Kelley acknowledged that revenues were not growing at the red-hot pace they set in 1997, a record year. "Over the last two quarters revenues have grown more slowly than expenses," he said. "We have been trying to bring expense growth in line."

Despite the difficulties, State Street reported a 17% gain in fee revenues, to $575 million. Securities processing and servicing fees showed the strongest growth, jumping 38% to $56 million.

Fees from custody and other fiduciary services rose 13% to $432 million.

Assets under administration topped $5.3 trillion in the quarter. Assets under management climbed to $574 billion.

Shares in State Street ended Wednesday's trading at $75.5625, down $6.0625.

SouthTrust Corp.

SouthTrust, the nation's 21st-largest banking company, reported record net income of $109.7 million, a 23% gain. Earnings per share of 65 cents beat the consensus by 2 cents.

"Loan volume was up sharply, fee income was absolutely solid, and efficiency continued to improve amid further cost controls," said Jacqueline Reeves, a bank analyst at Putnam, Lovell, de Guardiola & Thornton.

Loans, net of unearned income, rose 18.4%, to $29.2 million. Noninterest income, excluding securities transactions, jumped 17%, to $107.3 million.

Efficiency at the Birmingham, Ala.-based company improved to 56% from 58% in last year's second quarter.

"That's been one of their strengths" for sometime, Ms. Reeves said.

Provisions for loan losses soared 25% to $31.8 million, but that was largely due to the chargeoff of an exposure to United Companies Financial Corp., a Louisiana subprime lender now in bankruptcy proceedings.

Stock in SouthTrust closed Wednesday's trading at $37.3125, up 28.125 cents. +++

Wachovia Corp.

Winston-Salem, N.C.

Dollar amounts in millions (except per share) Second Quarter 2Q99 2Q98

Net income $248.0 $210.0

Per share 1.19 1.00

ROA 1.51% 1.31%

ROE 18.14% 16.11%

Net interest margin 4.31% 4.21%

Net interest income 627.0 595.0

Noninterest income 415.0 318.0

Noninterest expense 581.0 517.0

Loss provision 75.0 68.0

Net chargeoffs 74.0 68.0

Year to Date 1999 1998

Net income $491.0 $405.0

Per share 2.37 1.93

ROA 1.51% 1.28%

ROE 18.22% 15.71%

Net interest margin 4.36% 4.21%

Net interest income 1,245.0 1,175.0

Noninterest income 749.0 605.0

Noninterest expense 1,073.0 1,011.0

Loss provision 155.0 143.0

Net chargeoffs 155.0 142.0

Balance Sheet 6/30/99 6/30/98

Assets $67,013.0 $64,727.0

Deposits 40,816.0 39,915.0

Loans 48,428.0 44,459.0

Reserve/nonp. loans 261.77% 429.89%

Nonperf. loans/loans 0.43% 0.29%

Nonperf. assets/assets 0.35% 0.24%

Nonperf. assets/loans + OREO 0.48% 0.34%

Leverage cap. ratio NA 8.91%

Tier 1 cap. ratio 7.60% 8.10%

Tier 1+2 cap. ratio 11.10% 10.50%

U.S. Bancorp

Minneapolis, Minn.

Dollar amounts in millions (except per share) Second Quarter 2Q99 2Q98

Net income $374.3 $320.3

Per share 0.51 0.43

ROA 1.97% 1.80%

ROE 23.80% 20.80%

Net interest margin 4.86% 4.91%

Net interest income 823.3 777.9

Noninterest income 655.9 561.1

Noninterest expense 752.8 724.6

Loss provision 126.0 93.0

Net chargeoffs 140.3 106.7

Year to Date 1999 1998

Net income $741.1 $649.1

Per share 1.02 0.86

ROA 1.98% 1.85%

ROE 24.10% 21.40%

Net interest margin 4.84% 4.95%

Net interest income 1,616.7 1,545.9

Noninterest income 1,282.2 1,019.6

Noninterest expense 1,471.6 1,330.2

Loss provision 243.0 183.0

Net chargeoffs 279.9 209.9

Balance Sheet 6/30/99 6/30/98

Assets $77,390.0 $73,750.0

Deposits 49,267.0 49,307.0

Loans 59,928.0 54,796.0

Reserve/nonp. loans 327% 359%

Nonperf. loans/loans 0.49% 0.49%

Nonperf. assets/assets 0.41% 0.41%

Nonperf. assets/loans + OREO 0.53% 0.54%

Leverage cap. ratio 7.10% 7.40%

Tier 1 cap. ratio 6.60% 7.20%

Tier 1+2 cap. ratio 11.10% 11.50%

First Union Corp.

Charlotte, N.C.

Dollar amounts in millions (except per share) Second Quarter 2Q99 2Q98

Net income $873.0 $249.0

Per share 0.90 0.26

ROA 1.56% 0.46%

ROE 21.59% 6.83%

Net interest margin 3.88% 3.80%

Net interest income 1,878.0 1,832.0

Noninterest income 1,706.0 1,531.0

Noninterest expense 2,053.0 2,809.0

Loss provision 180.0 150.0

Net chargeoffs 180.0 156.0

Year to Date 1999 1998

Net income $1,579.0 $1,039.0

Per share 1.63 1.07

ROA 1.42% 0.97%

ROE 19.73% 13.94%

Net interest margin 3.81% 3.94%

Net interest income 3,689.0 3,691.0

Noninterest income 3,656.0 2,880.0

Noninterest expense 4,562.0 4,647.0

Loss provision 344.0 285.0

Net chargeoffs 344.0 285.0

Balance Sheet 6/30/99 6/30/98

Assets $229,911.0 $228,996.0

Deposits 133,603.0 138,598.0

Loans 133,579.0 137,390.0

Reserve/nonp. loans 1.34% 1.36%

Nonperf. loans/loans 0.63% 0.58%

Nonperf. assets/assets 0.41% 0.40%

Nonperf. assets/loans + OREO 0.70% 0.66%

Leverage cap. ratio 5.95% 6.01%

Tier 1 cap. ratio 6.61% 7.04%

Tier 1+2 cap. ratio 10.61% 11.35%

SouthTrust Corp.

Birmingham, Ala.

Dollar amounts in millions (except per share) Second Quarter 2Q99 2Q98

Net income $109.7 $89.5

Per share 0.65 0.55

ROA 1.13% 1.07%

ROE 15.72% 14.31%

Net interest margin 3.81% 3.78%

Net interest income 340.5 292.3

Noninterest income 107.0 93.1

Noninterest expense 248.9 222.9

Loss provision 31.8 25.5

Net chargeoffs 20.4 13.7

Year to Date 1999 1998

Net income $214.2 $175.9

Per share 1.27 1.09

ROA 1.12% 1.09%

ROE 15.56% 14.51%

Net interest margin 3.76% 3.80%

Net interest income 660.8 567.8

Noninterest income 218.1 181.3

Noninterest expense 491.5 435.4

Loss provision 62.1 43.3

Net chargeoffs 35.8 26.8

Balance Sheet 6/30/99 6/30/98

Assets $40,066.5 $34,667.9

Deposits 26,296.7 21,150.8

Loans 29,178.4 24,654.1

Reserve/nonp. loans 357.43% 335.61%

Nonperf. loans/loans 0.39% 0.43%

Nonperf. assets/assets 0.42% 0.50%

Nonperf. assets/loans + OREO 0.58% 0.70%

Leverage cap. ratio 6.08% 6.93%

Tier 1 cap. ratio 6.76%* 7.89%

Tier 1+2 cap. ratio 10.50%* 12.50%

* Estimated

Fleet Financial Group

Boston

Dollar amounts in millions (except per share) Second Quarter 2Q99 2Q98

Net income $450.0 $393.0

Per share 0.74 0.65

ROA 1.65% 1.59%

ROE 19.38% 18.97%

Net interest margin 4.42% 4.60%

Net interest income 1,031.0 981.0

Noninterest income 1,036.0 809.0

Noninterest expense 1,178.0 1,017.0

Loss provision 146.0 118.0

Net chargeoffs 146.0 118.0

Year to Date 1999 1998

Net income $888.0 $716.0

Per share 1.45 1.18

ROA 1.64% 1.51%

ROE 19.33% 17.51%

Net interest margin 4.50% 4.67%

Net interest income 2,073.0 1,919.0

Noninterest income 1,995.0 1,504.0

Noninterest expense 2,303.0 2,014.0

Loss provision 295.0 210.0

Net chargeoffs 295.0 210.0

Balance Sheet 6/30/99 6/30/98

Assets $106,948.0 $100,713.0

Deposits 66,344.0 66,992.0

Loans 75,287.0 66,754.0

Reserve/nonp. loans 559.42% 490.82%

Nonperf. loans/loans 0.41% 0.47%

Nonperf. assets/assets 0.30% 0.33%

Nonperf. assets/loans + OREO 0.42% 0.50%

Leverage cap. ratio 7.27% 7.05%

Tier 1 cap. ratio 6.94% 6.80%

Tier 1+2 cap. ratio 11.05% 10.84%

State Street Corp.

Boston

Dollar amounts in millions (except per share) Second Quarter 2Q99 2Q98

Net income $123.0 $109.0

Per share 0.75 0.66

ROA 0.91% 1.00%

ROE 20.30% 20.50%

Net interest margin 1.61% 1.96%

Net interest income 190.0 178.0

Noninterest income 575.0 493.0

Noninterest expense 577.0 507.0

Loss provision 4.0 4.0

Net chargeoffs 1.0 0.0

Year to Date 1999 1998

Net income $245.0 $215.0

Per share 1.49 1.30

ROA 0.46% 1.03%

ROE 20.50% 20.80%

Net interest margin 1.68% 2.02%

Net interest income 388.0 358.0

Noninterest income 1,127.0 956.0

Noninterest expense 1,134.0 981.0

Loss provision 8.0 9.0

Net chargeoffs 4.0 0.0

Balance Sheet 6/30/99 6/30/98

Assets $53,330.0 $46,711.0

Deposits 32,782.0 29,421.0

Loans 7,303.0 6,044.0

Reserve/nonp. loans 517% 1,069%

Nonperf. loans/loans 0.23% 0.14%

Nonperf. assets/assets 0.04% 0.02%

Nonperf. assets/loans + OREO 0.28% 0.18%

Leverage cap. ratio 5.30% 5.90%

Tier 1 cap. ratio 12.80% 14.10%

Tier 1+2 cap. ratio 13.00% 14.40% ===

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