How Regionals Got In (and Could Get Out of) This Mess

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Remember the old days, when some regional banks would report good news at earnings time, and others bad?

The financial crisis is far from over, but a pack of regionals provided just such a study in contrasts Tuesday. Not only did the split news give a whiff of the old normal, but it provided signs of recovery and what kinds of companies could lead it.

Regions Financial Corp. sang a familiar tune: a greater-than-expected third-quarter loss fueled by a continued rise in nonperforming assets across several loan portfolios. But Comerica Inc. and M&T Bank Corp. gave strong indications that their biggest problems may be in the past, and Marshall & Ilsley Corp. reported some positive credit-quality trends amid its fourth straight quarterly loss.

Breaking ranks with some of his peers, Comerica chairman and chief executive Ralph Babb Jr. sounded … optimistic.

"Generally, things seemed to have bottomed," he said during the $59.6 billion-asset Dallas company's call with analysts. "Customers are speaking in more positive tones than they were just three months ago. However, they remain cautious and continue to hold the line on expenses, inventory levels, and capital-expansion plans."

Some companies have farther to go than others, with their prospects for recovery dependent on loan mix, geography and aggressiveness in dealing with credit issues. But some of the companies have reason to be guardedly upbeat, analysts said.

Profits from Comerica and M&T are a validation of their conservative operating strategy, said Jeff Davis, an analyst at First Horizon National Corp.'s FTN Equity Capital Markets Corp. They've also been lucky to catch some breaks in their regional economies, with Comerica clearly benefitting from bottoming out of California construction market, he said.

Comerica's loan-loss provision was essentially flat from the second quarter but nearly doubled from a year earlier. Net chargeoffs fell 3.6% while doubling from a year earlier. Nonperforming assets rose 6.1% and 48% from a year earlier.

Stabilizing credit helped the company outperform expectations. Comerica lost $15 million, when including dividends on preferred stock, compared with a $16 million loss in the second quarter and profit of $28 million a year earlier. Comerica was profitable excluding the dividends.

A focus on middle-market business clients, instead of real estate, helped Comerica. Chief credit officer Dale Greene said during a call that loss-severity in middle-market lending should not be as substantial as losses in commercial real estate. The company has also reduced its exposure to residential real estate.

M&T Bank Corp. also beat Wall Street's expectations due to deftness in managing credit costs. Profit rose 150% from the second quarter and 40% from a year earlier, to $127.7 million. Including dividends on preferred stock, profit was $113.9 million. Rene Jones, the $70-billion asset Buffalo company's chief financial officer, said that the "solid" results were due to "our approach of providing basic banking services to customers we know in the communities where we live and work."

M&T's provision rose 7.5% from the second quarter and 52.4% from a year earlier. Net chargeoffs edged up 2.2% from the second quarter but rose 50% from a year earlier. Nonperforming assets rose 8.3% from the second quarter and nearly doubled from a year earlier.

M&T hasn't lost as much money on bad loans as others throughout the recession, due largely to conservative underwriting. Its home in upstate New York and the Mid-Atlantic hasn't been as hard-hit by the housing meltdown.

At Regions, chairman and chief executive C. Dowd Ritter was extremely cautious with his remarks. "While everyone is talking about green shoots, unemployment is still increasing and who knows what the outlook will be," he said, predicting that the inflow of nonperforming assets at the $140 billion-asset Birmingham, Ala, company should peak by early next year.

Regions has long been plagued by significant operations in Florida and Atlanta, getting stung on dealings in condominiums, home equity, and home builder loans. The problems grew recently, as credit cracks surfaced elsewhere, most notably in the company's multifamily book and, to a lesser extent, shared national credits.

The loan-loss provision rose 12.4% from the second quarter and 146% from a year earlier. Net chargeoffs jumped 38.5% from the second quarter and 63.5% from a year earlier. Nonperforming assets rose 20% from the second quarter and 132% from a year earlier. The result: Regions lost $437 million including preferred stock dividends, compared to a $244 million second-quarter loss and $79 million in profit a year earlier.

Marshall & Ilsley Corp. posted its fourth straight quarterly loss on bad loans to homeowners and other banks while announcing plans to raise $775 million. The Milwaukee company lost $248 million as it continues to struggle with housing and construction loan portfolio in Florida and Arizona. M&I lost $209 million in the prior quarter and earned $83 million a year earlier. The company's non-performing loans, chargeoffs and provisions declined from the prior quarter, although they were up dramatically from a year ago.

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