Two of the nation's biggest banks,

Citigroup

(C) - Get Report

and

Bank of America

(BAC) - Get Report

, reported strong first-quarter earnings on Monday, largely because of a vibrant consumer lending market and a dip in the rate of loan defaults by U.S. corporations.

First-quarter profit at Bank of America rose 11%, while Citigroup's profit rose 18% on a continuing operating basis, which excludes a gain on the sale of its former

Travelers Property Casualty Group

(TAPA)

, spun off in a March 2002 initial public offering.

The lone disappointment in the banking sector was the first-quarter announcement from

FleetBoston Financial

(FBF)

, which reported a 21% decline in net income. Fleet's poor performance had been expected because the bank is still struggling to come to grips with the bad loans arising from its large Latin American banking operation.

Bank of America, based in Charlotte, N.C., earned $2.42 billion, or $1.59 a share, compared with $2.18 billion, or $1.38 a share, in the year-ago period. The bank's earnings were fueled by strong income growth in its consumer and mortgage banking business. The Thomson Financial/First Call consensus estimate called for the bank to earn $1.48 a share.

Citigroup, the nation's biggest financial-services firm, earned $4.1 billion, or 79 cents a share, from continuing operations, up from $3.48 billion, or 66 cents, a year ago. On a net income basis, the company earned 93 cents a share last year, a figure that includes the gain from the Travelers IPO. Citigroup's consumer business accounted for more than half of its quarterly profit. The consensus estimate called for Citigroup to earn 78 cents a share in the quarter.

The strong earnings from Bank of America and Citigroup pushed the Philadelphia KBW Bank Index up 1.24% in midday trading.

Boston-based Fleet earned $567 million in the quarter, or 54 cents a share, compared with $735 million, or 70 cents a share, a year ago. Expenses at the bank remained steady compared with last year, but total revenue declined by about 12% to $2.76 billion. The consensus estimate called for the bank to earn 55 cents a share. Fleet matched that estimate, when looking at its earnings on a continuing operations basis. Using that analysis, the bank earned $577 million in the quarter, or 55 cents a share.

Maybe the best news for the nation's banks came on the corporate loan front, something that weighed down profit at many banks last year. While it's too early to sound the all clear, there are some encouraging signs that the worst may be over for the nation's banks when it comes big-ticket commercial loan losses.

All three banks that reported earnings Monday recorded sharp sequential drops in the amount of money set aside during the first quarter -- compared with the fourth quarter of 2002 -- to cover potential loan losses. Last week

SunTrust

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, the first big bank to report quarterly earnings, reported a similar downward trend.

That's quite a contrast with last year, when many big banks were forced to take hefty write-downs and charge-offs for bad loans to the energy, telecom and airline sectors. The surge in bad loans to corporations forced banks to keep putting aside more money each quarter to cover their losses.

For bank investors, any decline in the line item called "provision for credit losses" is a good thing because it may mark the top, if not the end, of the bad-loan crisis. That's because every dollar a bank sets aside each quarter for loan, or credit, losses means one dollar less in profit at the end of the quarter. And in some instances, the quarterly declines in this important line item on a bank income statement have been significant.

Bank of America, the nation's third-largest bank, set aside $833 million for loan losses in the quarter, a decline of 28% from the fourth quarter of 2002 and roughly unchanged from a year ago. Citigroup, meanwhile, set aside $2 billion for loan losses, 24% less than last quarter and down 20% from a year ago. SunTrust, meanwhile, reported a whopping 50% reduction in money set aside for credit losses compared with a year ago.

In another measure of credit quality at the nation's banks, the total dollar value of nonperforming loans -- loans that are at least 90 days overdue -- also are showing signs of stabilizing, and improving in few instances.

Bank of America listed $4.8 billion of its commercial and consumer loan portfolio as nonperforming, down 5% from the fourth quarter of 2002 and up 4% from a year ago. SunTrust reported $548 million in nonperforming assets, up slightly from $542 million in the fourth quarter.

But the nation's bankers are not ready to declare victory over bad loans in their lending portfolios. With the economic situation still uncertain, bank officials said a weakening economy in the second half of the year could cause a new surge in corporate loan defaults and consumer bankruptcy filings.

"Large corporate credit is moving in the right direction," said James Nance, Bank of America's chief financial officer, in a conference call with analysts. "But we won't declare victory until it's clearly evidenced in the numbers."

Indeed, some bank analysts also appear wary of calling an end to the credit problems at the nation's lenders.

Jon Balkind, a Fox-Pitt Kelton bank analyst, said in a research note that he expects Citigroup, for instance, will have to increase its provision for corporate loan losses later this year.

"Credit was stable. However, we believe corporate provision's levels have to go higher," said Jon Balkind, a Fox-Pitt Kelton bank analyst, in a research note commenting on Citigroup's earnings.