Even banks that came through the financial meltdown in better shape than their peers can't grow their lending in this economy--but they are becoming more profitable.

Second-quarter profits improved at strong regional banks U.S. Bancorp (USB), M&T Bank Corp. (MTB) and Comerica Inc. (CMA), they reported Wednesday, because more borrowers were able to repay their loans and the profit margin on loans increased. All said loan demand remains anemic, and U.S. Bancorp and M&T managed to report growing revenues by other means.

"It's not as if we see much of a drop in [loan] demand," M&T's Chief Financial Officer Rene Jones said during a conference call. "It just hasn't gotten any better."

Bankers outlined some clouds on the horizon: The rise in profit margins in the lending business will soon come to an end if loan growth doesn't pick up. "I hope" loan demand will improve soon, U.S. Bancorp's Chief Executive Richard Davis said, adding, "Oh my gosh."

And while M&T, of Buffalo, N.Y., and Comerica, of Dallas, disclosed that they spent less to generate revenue--which improved efficiency--U.S. Bancorp's efficiency ratio worsened slightly because the financial services reform bill President Barack Obama signed requires banks to spend to reshape products and operations to comply. "I for one am quite emboldened by the fact that now we've moved from the political to the regulatory environment on these 201 rules," Davis said. "Regulators have a more balanced and a more measured view of how things operate."

Second-quarter profit at U.S. Bancorp, based in Minneapolis, rose 55% from a year earlier, to $752 million, and revenue rose 8.7% to $4.5 billion. The bank grew its assets almost 7% from a year earlier, to $283 billion, through the purchase of other banks and loans. Sandler O'Neill & Partners LP analyst R. Scott Siefers called it "a strong quarter on better revenues and lower credit costs than we forecast."

M&T's profit almost quadrupled, to $189 million--in part because the quarter lacked one-time charges that weighed on M&T a year ago. Revenue rose 8.7% from a year earlier, to $841 million. The bank "is bucking the trend that we've seen so far from other banks," Sandler analyst Joseph Fenech wrote in a research report.

Comerica's profit also nearly quadrupled, to $70 million, and through its revenue fell 12% from a year earlier, it rose 1.1% from the first quarter, to $616 million. "Credit improvement continued to be broad based," BMO Capital Markets analyst Peter Winter wrote in a research report.

Also on Wednesday, Wells Fargo & Co. (WFC), the country's fourth largest bank by assets, reported net income rose 20% from the prior quarter, to $3.1 billion. "We believe credit quality has indeed turned the corner," Chief Financial Officer Howard Atkins said.

Those results stand in stark contrast to the earnings reports earlier this week from Zions Bancorp. (ZION) and Marshall & Ilsley Corp. (MI), which continued to struggle despite improvement in losses from bad loans.

Almost everywhere, demand for loans is weak because many businesses remain in such good shape financially, and so timid about expanding their operations, that they don't even need to tap their existing lines of credit, much less take out new loans.

Comerica CFO Elizabeth Acton told investors during a conference call that the bank's expectations for loan growth are dropping, even though "we did see growth at period end on the commercial side, including real estate."

U.S. Bancorp executives said that credit-line utilization among middle market businesses improved, but bigger corporations are dragging the utilization rate down.

Credit is improving, but some bankers remain cautious. Comerica reduced the amount of money it reserved for loans that it expects won't be paid back in the future; U.S. Bancorp and M&T added to their reserves. M&T's CFO said he hopes loan growth will pick up, which would require the bank to reserve for new loans, while U.S. Bancorp said high unemployment, falling home prices, and the economy overall are not strong enough to warrant reserve reductions. Some other banks, including J. P. Morgan Chase & Co. (JPM) and Citigroup Inc. (C), did reduce reserves in the second quarter.

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com

(Marshall Eckblad contributed to this article.)
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