National City Corp. and Regions Financial Corp. said consumers spooked by bank failures moved money out of accounts last quarter.
Nat City's third-quarter loss, its fifth in as many quarters, ballooned on continued mortgage stress and what its chief executive called "unthinkable" market turbulence that cut into deposit levels.
Regions posted a profit for the quarter, but it fell 80% from a year earlier, to $79.5 million, as credit costs surged and deposits shrank as a result of widespread skittishness about the safety of deposits.
Nat City's deposits dropped about 1%, and Regions' fell more than 2%, even though it absorbed $900 million of deposits in August from the failed Integrity Bank in Alpharetta, Ga.
C. Dowd Ritter, the $144 billion-asset Regions' chairman and CEO, said during a call with analysts Tuesday that many customers moved bank deposits into Treasury securities, signaling stronger confidence in the federal government than in banks.
Peter E. Raskind, Nat City's CEO, said in an interview Tuesday that he expects economic conditions to weigh further on customers' pocketbooks, keeping the "very tough competition" for deposits at a heightened level. He also said his $150 billion-asset company expects the unemployment rate to reach 7% next year and housing prices to fall another 12% to 15% before leveling off at some point next year.
"It feels awfully recessionary to us right now," Mr. Raskind said. "Our view is that it will get worse before it gets better."
But both Nat City and Regions said the myriad steps taken by the federal government to ease the credit crisis — from the Treasury Department's $700 billion plan for rescuing the financial sector to the increase in the Federal Deposit Insurance Corp.'s insurance limits to $250,000 per account — have helped calm depositors' nerves over the past month and, by extension, helped each company stem deposit losses.
Irene Esteves, Regions' chief financial officer, said on a call Tuesday that deposit trends stabilized late last month, particularly after the FDIC raised its insurance limits. "We've seen a tremendous increase in deposits in the last month or so."
Nat City said the hits it took to deposits were largely short-lived — in particular, reactionary mini-runs after the collapses of IndyMac Bancorp in July and Wachovia Corp. last month.
"We have already a greater sense of calm on the part of our customer base," Mr. Raskind said.
Nat City employees have made extraordinary efforts to educate customers that its books do not contain what afflicted IndyMac and Wachovia the most, option adjustable-rate mortgages, he said. "Relative to other institutions that have not made it, our deposit base is demonstratively different."
The biggest earnings hit for both Regions and Nat City came from loan-loss provisions.
Regions said its provision rose nearly fourfold from a year earlier, to $417 million. Excluding merger-related expenses and costs tied to a leveraged lease settlement and mortgage servicing rights impairment, the Birmingham, Ala., company reported earnings of 15 cents a share, which missed the average Wall Street estimate by 12 cents, according to Thomson Reuters.
Mr. Ritter said that most of Regions' issues remained in its home builder and home equity portfolios, and that the company worked to purge its balance sheet of residential-related loans.
Assets are being sold at a 50% discount to carrying value, he said. "We're not waiting for the storm to blow over. Importantly, our issues are well defined … and we're diligently working to address those exposures."
Mr. Ritter expressed interest in the government's plan to buy preferred shares in banking companies, saying Regions' board approved such a sale last week.
Regulators have told the company it would be eligible for the program, he said, though it has not applied to participate. It could raise $1.2 billion to $3.5 billion of capital by participating, he said.
Ms. Esteves said that Regions has enacted an "internal" program to shed distressed assets, though it would also consider selling some to the government as part of the Treasury's plan to buy toxic bank assets.
"There are still questions about what properties would qualify and how they will be valued," she said. "Until that is resolved, we're not sure if we will participate."
Excluding a preferred dividend payout, Nat City said it lost $729 million, or 85 cents a share, after losing $19 million, or 3 cents a share, in the same quarter last year.
Analysts on average had forecast a third-quarter loss of 31 cents a share.
Mr. Raskind said Nat City is "quite interested" in the Treasury plan to buy bad mortgage assets, and as the economy grinds to a halt, his company is analyzing the merits of the government's plan to invest directly in banks as a way to beef up capital.
But he also said his Cleveland company has not been waiting on federal assistance. Mr. Raskind said raising $7 billion in April has put it in a strong capital position, with a Tier 1 ratio of 11%.
He also said Tuesday that, over the next three years Nat City will shed 4,000 jobs, or 14% of its work force, across all departments to save between $500 and $600 million.
For months Nat City has been rumored as a buyout target, and its share price has dropped about 80% this year. Mr. Raskind said it is beefing itself up to survive as a stand-alone company.
"We are doing the right things for the future," he said. Nevertheless, "if at some point there was a transaction that makes more sense for the shareholders, the board would consider it and act it if appropriate."
Andrew Marquardt, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, spoke somewhat favorably of Nat City's results.
"The lower deposits were a clear ramification of this environment, but in the end there wasn't an egregious loss," he said. "And while credit was bad, it wasn't worse than expected. So it was a generally OK result — on low expectations. "
Jeff Davis, a principal at Wolf River Capital LLC, said he was concerned about what Regions' deposit drop might portend. "Regions is profitable, so I'm not going to call them among the walking wounded, but the drop in deposits, if it were to continue, would be a big concern."