Regionals' Credit Execs Caught in the Spotlight

Regions Financial Corp. would have gladly welcomed questions from Wall Street that went beyond the company's growing credit issues.

Unfortunately there was no letup Tuesday during a conference call lasting more than an hour, as analysts zeroed in on unexpected second-quarter spikes in bad loans and chargeoffs, which contributed to a quarterly loss. Regions, meanwhile, acknowledged for the first time that problems had meaningfully spread beyond its housing-related portfolios.

Brian Foran, an analyst at Goldman Sachs Group Inc., apologized to management for "beating a dead horse" on the issue of credit, but he characterized a $1.75 billion rise in nonperforming assets as "sticker shock to a lot of investors."

Regions, of Birmingham, Ala., was not the only midsize banking company in the hot seat Tuesday when it came to credit. Comerica Inc. reported a second-quarter loss, too, and some skepticism greeted the company's relatively upbeat forecasts on credit quality and economic trends.

While many large banking companies relied on investment banking income, asset sales and other special items to boost results in the quarter, concern has mounted about the regionals considered more susceptible to geographic concentrations of bad loans.

Regions pointed to Florida, Georgia, North Carolina and South Carolina as its most worrisome states. Even Comerica — which has more far-flung geographic reach than the typical "regional" banking company — has had to isolate its worst markets.

Dale E. Greene, Comerica's chief credit policy officer, said during an interview that deterioration in its residential development book was nearing its peak. Though home builder-related chargeoffs were rising in Florida, he was seeing stabilization in California and resiliency in Texas, he said. He said commercial loans are deteriorating at a faster pace, particularly in the Midwest.

Regions had perhaps the most explaining to do after reporting a loss of $244 million, or 28 cents a share, returning to the red after a narrow first-quarter profit. Nonperforming assets rose 47% from the first quarter and more than doubled from a year earlier, to $3.43 billion, including what executives called the highest level of souring commercial real estate so far in the recession.

But it had very few specifics to offer, and its explanatory efforts seemed to fall flat on analysts' ears.

"It is a little bit hard to gauge about where we think the nonperforming levels will go," said Michael Willoughby, Regions' chief credit officer. He declined requests to estimate when losses might peak, instead saying he believed aggregate losses this year and next should fall between $3.4 billion and $5.9 billion.

For more than a year, Regions' executives had assured that problems were confined to home builders, home equity and condominiums. The $143 billion-asset company this time added "income-producing properties," particularly retail developments and apartments, to assets under pressure.

The loan-loss provision more than doubled from the first quarter and was nearly triple that of a year earlier, at $912 million. Net chargeoffs rose 26% from the first quarter and 135% from a year earlier, to $491 million.

C. Dowd Ritter, Regions' chairman and chief executive, said during brief comments on the call that chargeoffs "are likely to remain elevated" into next year. "While there are some signs that we may be near the bottom of this recessionary economic cycle, we can't presume a near-term rebound," he added.

Ritter was largely quiet as Willoughby and William Wells, the chief risk officer, fielded question after question about real estate exposure. They said third-quarter chargeoffs would likely surpass the second quarter's and that losses will continue to occur. Because of cash flows, restructured loans are more likely, while commercial developments are likely to suffer less-severe losses than incomplete housing projects.

Wells said, "We've got a lot of our worst credits behind us," and Willoughby added that Regions is relying on a "consistent methodology that has proven true for us during the good times and the bad times."

Comerica's Greene also sounded optimistic, saying the severity of actual losses in its commercial book may not be as great as residential development because the $63 billion-asset Dallas company typically has diverse collateral from borrowers to better work out loans.

The comments contrasted with views offered by other companies in recent days. On Friday, JPMorgan Chase & Co. warned that loss severity could rise over the tail end of the recession. And Joe Price, Bank of America Corp.'s chief financial officer, said that it is "hard to get comfortable" making credit-related projections using traditional models.

Comerica lost $16 million in the second quarter, or 10 cents a share, after paying preferred dividends. After subtracting several one-time items, including a $113 million securities gain, analysts said Comerica's core loss ranged from 45 cents to 60 cents, worse than the average analyst estimate of 44 cents as reported by Thomson Reuters.

Continued credit deterioration was the main culprit — Comerica's provision rose 53.7% from the first quarter and nearly doubled from a year earlier, to $312 million. Nonperforming assets rose 15% from the first quarter and 64% from a year earlier, to $1.23 billion.

Unlike Regions, Comerica's Greene was willing to forecast a peak, however tentatively. "We think the third quarter will look a lot like the second, and we hope the fourth quarter will be modestly better," he said. "But that also assumes the economy doesn't get worse, and that's anyone's guess."

Brett Rabatin, an analyst at Sterne, Agee & Leach Inc. in Nashville, said Comerica is being "a little optimistic" with its forecast. "The longer the economic cycle lasts, the more potential that there will be losses, particularly in C&I credits," he said. "Will the third quarter in fact be the peak in chargeoffs? I think that question is still a little early to be answered."

Jeff Davis, an analyst with First Horizon National Corp.'s FTN Equity Capital Markets Corp., said Comerica does have some positives, including ample capital and good underwriting standards, and "they've been preparing for the depression that is in Michigan for nearly a decade."

Comerica does not have heavy exposure to the auto industry: none of its dealer customers are being forced to close and its other related customers are viewed as "essential suppliers" to the automakers, Davis said. Still, he was also skeptical about a third-quarter peak in credit deterioration.

"Once the economy turns, there will still be a quarter or two before credits peak for most companies," he said. "But a turn is not at hand, so elevated credit costs will probably continue until further notice."

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