Core operating performance at large U.S. banks was not as slipped in second-quarter of 2004 compared with the first quarter, according to a report released today by Standard & Poor’s Ratings Services.

“Softness in market-intensive businesses muted core operations. Reported earnings for the large complex banks were distorted by special items, most significantly the multibillion legal settlements at Citigroup Inc. and J.P. Morgan Chase & Co.,” noted the rating agency.

It also noted that the quality of earnings at some banks was blurred. “For example, Bank of America Corp. took huge securities gains during the second quarter, causing accumulated other comprehensive income to sink further into the red,” it said. “By contrast, U.S. Bancorp and Wells Fargo & Co. recognized losses on their investment securities portfolios to better position their balance sheets for rising interest rates.”

Standard & Poor’s also said that the banks’ second quarter financials are revealing “big swings from the positive column to the negative in the market value of the investment securities portfolios, especially those saddled with newly issued [mortgage-backed securities].”

“While regulatory capital ratios and our own capital model exclude the accumulated other comprehensive income account, we do take note of large portfolios of underwater securities because they can decrease a bank’s financial flexibility,” it said. “Many of the large complex banks continued to take provisions less than actual net charge-offs, thereby reducing loan loss reserves, although this game for boosting profitability is apparently coming to an end.”