First Union Going to the Whip on Wachovia Deal

First Union (FTU Quote - Cramer on FTU - Stock Picks) is pulling away from SunTrust (STI Quote - Cramer on STI - Stock Picks) as their merger battle enters the home stretch.

With a Wachovia (WB Quote - Cramer on WB - Stock Picks) shareholder vote on their $14 billion tie-up just three weeks away, First Union on Thursday served up a solid second quarter, displaying clearly improved results in once-struggling areas including corporate lending, retail banking and expense management.

First Union posted second-quarter earnings of 66 cents a share, beating the Thomson Financial/First Call consensus by 3 cents. On an operating basis, latest-quarter earnings were about 9% below year-ago levels. But those who remember last year's massive charges to shutter and restructure weak business lines are only too happy to see improvement.

Jazzed

"First Union has turned the corner and then some," exclaimed CEO Ken Thompson on a conference call with analysts and investors.

Even one-time critics of the North Carolina bank were impressed. "Clearly, the new management led by Ken Thompson has done a lot to make this a much better company," says Stephen Gresdo, the manager of a hedge fund that has a position in Wachovia, but no First Union or SunTrust holdings. Gresdo saw a "very good quarter" at First Union, replete with revenue growth, expense control and strong credit-risk management.

Lock Step First Union, Wachovia rally as SunTrust lags behind

Gresdo and some of his colleagues at bankstocks.com, a New York-based Web site that focuses on shares in financial institutions, were critical of First Union when former CEO Edward Crutchfield was at the helm. It was under his watch that the bank's major problems developed. One high-profile trouble spot was First Union's acquisition of Philadelphia-based CoreStates Financial in mid-1998, where a rocky integration period was followed by profit shortfalls.

The bank took a number of stabs at restructuring, including two attempts in 1999. Last June it made its most drastic move, taking $4 billion in charges under a plan that included selling off large pieces of itself.

"We had been critical of some things management had done in the past," says Gresdo, noting the improvements this quarter. But "we have been vocal fans of the First Union/Wachovia deal."

Unfluffy

First Union this spring agreed to acquire Wachovia in a stock swap valued at about $14 billion. SunTrust countered with an unsolicited bid that initially offered a 17% premium to the First Union pact. But the premium has since shrunk to about 3% as investors warmed to the idea of a First Union deal and worried about shareholder dilution at SunTrust. Most observers now expect First Union to carry the day.

Earnings per share were "above expectations, and there was no noise or fluff in the quarter," says Keefe Bruyette & Woods banks analyst Marni Pont O'Doherty, who has market perform ratings on First Union, SunTrust and Wachovia. Her firm has no underwriting relationship with any of these banks.

O'Doherty also credits First Union for being conservative in its outlook on credit quality and earnings growth for the rest of the year. The firm doesn't want to overpromise on performance at a crucial stage in the proxy battle with SunTrust, because "conventional wisdom seems to be tipping toward a First Union/Wachovia deal," notes O'Doherty.

First Union doesn't "want to fall short of the finish line," says O'Doherty. "They want to keep the heat on. They've done a good job selling the story, and the reaction has been pretty favorable."

First Union was up 76 cents to $33.92, Wachovia had risen $1.33 to $69.21 and SunTrust was up 76 cents to $64.18 in early afternoon trading.