Banks Report Higher Earnings

But Wachovia, SunTrust and Wells Fargo meet with varying success navigating the yield curve.
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A slew of big regional banks including

Wachovia

(WB) - Get Report

,

Wells Fargo

(WFC) - Get Report

and

SunTrust

(STI) - Get Report

each reported double-digit profit gains in the second quarter Tuesday. Revenue gains, however, were below Wall Street expectations at several lenders.

The spotty results probably won't stem the unease among bank investors that surfaced Monday following a disappointing earnings report from

Citigroup

(C) - Get Report

, the nation's biggest financial services firm.

The second quarter, as many predicted, is turning out to have been a difficult one for the nation's banks. Several lenders have reported problems navigating a tricky interest rate environment and lackluster trading market.

Some banks were particularly hard hit in the quarter by the so-called flattening of the yield curve, a narrowing of the spread between short- and long-term rates that can limit the profitability of lending and investment operations.

Of the big three regional lenders, the weakest performance was turned in by Wells Fargo, which reported a 42% decline in mortgage revenue, one of its biggest lines of business.

Profits rose 11% at the San Francisco-based bank, which earned $1.91 billion, or $1.12 a share, up from $1.71 billion, or $1 a share, a year ago. Revenue rose 6% to $7.87 billion.

But both earnings and revenue came in below Wall Street expectations. The Thomson Financial consensus estimate had the bank earning $1.13 a share and generating $8.1 billion in revenue.

Mortgage revenue declined by $559 million due mainly to a change in the valuation of its mortgage servicing portfolio. Mortgage servicing is a business in which a bank earns fees administering mortgages for both itself and other lenders.

Wachovia posted the strongest earnings gain, reporting a 32% rise in profits. The Charlotte, N.C.-based bank's results got a boost from several recent acquisitions.

In the quarter, Wachovia earned $1.65 billion, or $1.04 a share, up from $1.25 billion, or 95 cents a share. Revenue came in at $6.39 billion.

On an operating basis, which excluded merger-related charges, Wachovia earned $1.07 a share, which exceeded the analyst estimate by two pennies. But revenue was short the $6.52 billion analysts were expecting.

Wachovia's revenue was hampered by the lackluster performances of retail brokerage and investment banking operations. Investment banking revenue declined 1% to $1.27 billion. Revenue from the bank's big brokerage business fell 2% to $1.34 billion.

SunTrust, meanwhile, reported a 20% gain in second-quarter profits, even though it reported a noticeable rise in bad loans. So far, SunTrust is one of the few banks to report an increase in troublesome loans.

In the quarter, the Atlanta-based bank earned $466 million, or $1.28 a share, compared to $387 million, or $1.36 a share. Earnings per share fell due to an increase in the number of outstanding shares.

On an operating basis, which excluded merger-related costs, the bank earned $1.37 a share, matching the Wall Street estimate. Revenues rose 27% to $1.91 billion, also matching expectations. Earnings were bolstered by SunTrust's recent acquisition of National Commerce Financial.

In the quarter, the bank set aside $47.8 million to cover the cost of bad loans on its books, up from $2.8 million in the year-earlier period.

Net interest income rose 29% to $1.142 billion in the quarter, despite a tightening of the bank's net interest margin -- a measure of the profitability of its lending and investment operation. In the quarter, the bank's net interest margin was 3.16%, down from 3.28% in the first quarter of this year.

The bank blamed the flattening yield curve for the margin compression. However, even with the narrowing net interest margin, the bank said net income interest rose 5% from the first quarter of this year.