Regional banks reported mixed second-quarter results Tuesday, highlighting big gains in lending and fee businesses but at the same time confirming growing concerns about credit quality and the impact of merger activity.
Wells Fargo & Co. said double-digit loan growth and investment gains helped offset merger-related expenses, boosting profits 12%, to $1.04 billion. 
Earnings per share of 63 cents matched Wall Street's expectations, but the $220 billion-asset San Francisco banking company caught market watchers off guard by disclosing that earnings growth would slow down for the remainder of the year.
The company said its recent spate of more than 20 acquisitions would force it to record additional goodwill expenses, dampening yearend earnings per share by about 6 cents, to about $2.53. Investors sold shares of Wells Fargo, sending the stock down $1.3125 to $42.0625.
The two companies that beat estimates were the two with the most obvious credit-quality issues. Comerica Inc. said profits rose 11%, to $186 million, on gains from investment management activities that helped beat analysts' consensus by two cents. The company, however, reported a 24% increase in nonperforming assets from the first quarter level. At KeyCorp, profits fell 11.4%, to $248 million, and the company warned that chargeoffs would rise in the third quarter.
Mellon Financial Corp. said its profits gained 4%, to $247 million, also on the strength of investment management, trust, and brokerage revenues. The results met expectations.
AmSouth Bancorp said profits fell 24%, to $99.9 million, because of merger charges.
"It's a very mixed bag," said Lori Appelbaum, an analyst at Goldman, Sachs & Co. "Loan growth was good and deposit growth was good but deterioration in credit quality looms over the whole industry."
WELLS FARGO & CO.
Wells Fargo said loans grew 19%, pushing up net interest income by 8% to $2.2 billion. At the same time deposits increased 4%. As it has in previous periods, Wells Fargo used sizeable gains from its venture capital unit to offset the disparity in the growth of loans and deposits. Net venture capital gains, expected by Wall Street to be significantly lower because of the decline in technology stocks' valuation, came in strong at $320 million compared to last year's gain of $13 billion.
Ross Kari, the chief financial officer, said Wells Fargo also used those gains to reduce the impact of expenses related to its acquisition binge, which includes four deals in the first quarter; to increase spending in its Internet group; and to devote more resources to the integration of Norwest Corp.
"This is a good use for venture capital gains and the company's been quite above board about what it's doing with them," said James R. Bradshaw, an analyst at regional brokerage D.A. Davidson & Co. in Portland, Ore. The only problem Wells Fargo might face in the future, he said, is how to cover heavy expenses if its venture capital earnings, which are known to be volatile, dry up.
Total non-interest expenses rose 11%, to $2.6 billion.
Despite the strong earnings report, investors were alarmed at word that these expenses would rise over the next year due to Wells Fargo's rapid acquisition pace since it announced its merger with Norwest Corp. in 1998. "It shows that Wall Street is not ready to embrace cash earnings," said Andrew Collins, an analyst at ING Barings, who said he was lowering his earnings estimates for this year.
The company said it was still on track to report cash, or operating, earnings of $2.91 for the year, as it projected at the time of the Norwest merger.
"Our pending merger with First Security Corp. is on track and expected to be completed early in the fourth quarter of this year," said Richard Kovacevich, president and chief executive officer, in a statement. "Also important is the fact that we are already reaching our ambitious goal of double-digit revenue growth."
Unlike other large regional banking companies, Wells Fargo exhibited no signs of deteriorating credit quality. Net loan losses fell 3% from the first quarter, to $254 million.
COMERICA
Earnings per share of $1.15 beat the consensus by two cents.
The $41 billion-asset Detroit banking company said its results reflect its ability to generate business loans as well as generate fee revenue growth from investment advisory.
Net interest income rose 9%, to $415 million, boosted by a 13% increase in average business loans of $4 billion. Non-performing assets rose 24%, to $237 million.
"They delivered on what we thought we would see," said Diana P. Yates, an analyst with A.G. Edwards & Sons. Ms. Yates said the non-performing loans aren't as much of a concern right now because chargeoffs for the quarter actually dropped from the first quarter, to $16.3 million from $21 million.
Noninterest income rose 3%, to $200 million, fueled by a 28% gain from investment management fees, which rose to $76.9 million. Non-interest income also included a nonrecurring gain of $6 million from the demutualization of an insurance carrier.
Shares of Comerica fell 6.25 cents, to close at $49.5625.
MELLON FINANCIAL CORP.
Mellon Financial Corp. said net income rose 4%, to $247 million, driven by gains from its asset management and brokerage operations.
Earnings per share of 50 cents met Wall Street's expectations. Martin G. McGuinn, chairman and chief executive officer of the $47 billion-asset Pittsburgh banking company, said the company's efforts to streamline its businesses by divesting of certain consumer lending and processing operations and focusing on investment management and brokerage, are paying off.
Total fee revenues rose 9%, excluding the impact of last year's sale of Mellon's network services and mortgage operations and the previously disclosed expiration of a mutual fund administration contract. Including those items, fee revenues dipped 1.7%, to $773 million.
Total fees from trust and investment activities rose 9.7%, to $565 million, including an 18.7% gain in brokerage fees and a 9% gain in fees from investment management. Fees from custody and fund administration rose 13%, to $173 million. Equity investment revenues soared more than twofold over last year, to $17 million.
Non-performing assets rose 8.5% from the first quarter, to $228 million. The company attributed most of the increase to the status of loans to a health care company and its affiliates.
Shares of Mellon fell 40.625 cents, to close at $37.0625.
KEYCORP
KeyCorp's earnings per share of 57 cents beat the consensus by a penny, but its results were stung by non-performing loans and the impact of rising interest rates.
Last year's second quarter results also included profits from the sale of Key's Long Island branches and its credit card business, and loan securitizations by its Champion mortgage subsidiary.
Non-performing loans ballooned by 15.6% to $489 million from the first quarter, spread evenly between commercial and consumer loans, the company said. Net interest income dropped 3.4%, to $673 million.
Non-interest income dropped 8% from last year, to $475 million. Last year's results included $19 million from the sale of the branches and credit card business and $21 million from the sale of the home equity loans. This year, KeyCorp said fees from trust and asset management rose 5.5%, to $116 million.
"Second quarter results reflect the impact of aggressive actions we have taken over the past year to facilitate our continued development as an integrated, multiline financial services company," said Robert W. Gillespie, chairman and chief executive officer of the $84.7 billion-asset Cleveland-based company. "We are confident these actions are having their intended strategic effect."
KeyCorp executives surprised analysts by saying during a conference call Tuesday that chargeoffs are expected to increase in the third quarter. The executives would not elaborate, but some analysts said the increase could be significant.
"The thing that clouds the picture is the credit issue," said Timothy Willi, an analyst at A.G. Edwards & Sons. Mr. Willi added that Key did control its expenses and stabilized its net interest margin this quarter.
Shares of KeyCorp fell 43.75 cents, to close at $18.50.
AMSOUTH BANCORP
Amsouth Bancorp said profits fell 24.1%, to $99.9 million as merger-related and other charges eclipsed strong loan growth. Excluding the $58.2 million in charges, earnings per share of 41 cents met the consensus estimate.
The $42.6 billion-asset bank said most of the charges are for the final phase of its integration of First American Corp., the Nashville, Tenn., banking company it acquired last year. Another $3.9 million of after-tax charges are for the divestiture of its Arkansas banking business and the sale of IFC Holdings Inc., an investment products marketing firm inherited in the First American transaction. The company said it remained on track to achieve at least $100 million in cost savings from the merger this year.
Net interest income fell 6.6%, to $352.6 million, and the company's net interest margin narrowed to 3.63% from 3.77%.
The company reported strong consumer loan growth, driven by home equity lending. Loans grew 11% over last year, to $25 billion, and 2.3% over the first quarter. Home equity lending rose 5.5% from the first quarter, to $10.7 billion.
Fee income rose 3.2%, to $219.4 million. Fees from trust rose 6.5%, to $29 million. But fees from other consumer services fell, including a 1.8% decline in income from deposit account charges, to $56.8 million, a 3% drop in fees from investment services, to $56.9 million, and a 10.4% drop in credit card fees, to $4.6 million.
Shares of Amsouth fell 25 cents, to close at $16.75.
For more earnings data, go to the Ranking the Banks section of
