U.S. Bancorp, Hudson City Bancorp and KeyCorp vary plenty in their style of banking, but all three companies have followed what is shaping up to be the defining trend of the earnings season: a deceleration in the deterioration of credit.
A cause for celebration? Not exactly. Non-performing assets are still on the rise, and it may take a dramatic change in the U.S. employment picture for that to change. But with problem loans arising at a more manageable pace, U.S. Bancorp and Hudson City, which both reported third-quarter profits on Wednesday, are in as strong a position as ever to exert their gathering strength, while even some banks that are still in the red, such as KeyCorp, are getting extra breathing room from investors.
At U.S. Bancorp, nonperforming assets climbed 9.4% from the second quarter to the third, breaking a string of double-digit increases and giving Chairman and Chief Executive Officer Richard K. Davis a reason to believe that the economic environment will become easier to navigate.
"These past three months have brought us the beginning signs of stabilization and even some improvement in the markets we serve," he said on a conference call with analysts. "I would consider this quarter to be much closer to business-as-usual than we've seen in quite some time."
KeyCorp Chief Financial Officer Jeff Weeden said there may be "far less need" for KeyCorp to add to its relatively hefty reserves, as the rate of increase in nonperforming loans slowed to 4.8% in the third quarter from 25% in the prior quarter. While KeyCorp set aside $733 million in provisions to cover loan losses, mostly in its commercial real estate portfolio, the provisions fell 11% from the prior quarter.
But Weeden noted that future reserve levels will depend "obviously as to where the economy goes, so we remain cautious."
KeyCorp must be especially watchful of its $16.6 billion commercial real estate portfolio, which represents 27% of its total loan portfolio.
While the Cleveland-based company has aggressively slashed its exposure to homebuilders in Florida and California, its CRE business remains a source of pain. Nonperforming CRE loans registered an 8% quarter-to-quarter increase, with the sharpest rise coming from mortgages involving retail properties.
"While we continue to make progress on reducing exposures in targeted portfolios, we expect credit quality trends will likely remain under pressure until we see meaningful improvement in the economy," said Henry Meyer, KeyCorp's chairman and CEO.
Commercial real estate is less of an issue for U.S. Bank, which continued to diversify itself during the quarter with the aggressive pursuit of corporate lending and other business involving middle-market firms and large companies. The company's success with corporate customers helped boost fee revenue earned on treasury management services, along with commercial products such as syndicated loans.
U.S. Bancorp also registered a huge increase in mortgage banking revenue, which more than quadrupled from a year ago to $276 million. Davis said the company has continued to mop up business from weakened competitors, and has filled voids created by the industry shakeout.
"We have moved from being one of the top 25 mortgage banking providers in the country to being in the top seven," Davis said.
U.S. Bancorp also got a lift from following the plainest rule in banking — lend out money at a higher rate than it costs to borrow it. Its net interest margin widened to 3.67% versus 3.65% a year ago. That contributed to a 4.7% increase in earnings that put third-quarter net income at $603 million, or 30 cents a share.
Margin and mortgages were also the big themes at Hudson City, the Paramus, N.J.-based parent of Hudson City Savings Bank.
Hudson's net interest margin expanded to 2.3%, from 2.08% a year earlier, as the company attracted fresh deposits and paid out less interest.
"Since short-term rates remained at very low levels, we were able to reprice our deposits to a lower cost," chairman and CEO Ronald E. Hermance Jr. said. And while he doesn't expect the pace of expansion to pick up, "there is still some growth left in the margin," he said.
Hudson City has been lauded as one of the country's best banks for staying profitable throughout the recession. The company's main business involves large, tightly written loans to homeowners in New York, Connecticut and New Jersey. The company hasn't endured as many loan losses as other regional lenders because those property owners have fared relatively well.
Hermance said business has been booming on the lending front as the company refinances other banks' mortgages. Its total loans grew about 1.2% in the quarter as it originated $1.7 billion more in mortgages in the quarter, about 70% of them refinancings.
Hermance said more borrowers are coming to Hudson City from large, national banks and other lenders in his region, to refinance loans at a lower rate. The company is also benefitting from the fact that there are fewer mortgage providers than there were before the recession.
"What it means is we're taking a bigger share of the markets we're in," Hermance said.
Overall, Hudson City's earnings for the quarter rose 11% from a year earlier, to $135.1 million, or 27 cents a share.
At Cleveland-based KeyCorp, souring commercial loans led to a higher-than-expected quarterly loss of $397 million, or 52 cents a share, compared with a year-earlier loss of $36 million, or 10 cents a share.
KeyCorp did not get the same lift as U.S. Bancorp and Hudson City in net interest margin, which contracted from 3.17% a year ago to 2.8%.
The company said the decrease in the federal funds target rate has resulted in a "larger decrease in the interest rates on earning assets than that experienced for interest-bearing liabilities."
It also cited competition for deposits and a shift to higher cost, longer-term certificates of deposit.
But versus the second quarter, the net interest margin improved about 10 basis points, and Weeden said he anticipated a similar magnitude of growth this quarter.
However, analysts said KeyCorp still faces obstacles as it tries to stop bleeding red ink. Robert W. Baird & Co. analyst David George wrote in a note to clients: "We look for the company's earnings power over the next several quarters to be negatively impacted primarily by higher credit costs and weaker revenue trends."