Sour Loans Hurting Stocks, Earnings at Regional Banks

Despite soaring earnings and Tuesday's skyrocketing stock prices, all is not well in the land of banking.

The nation's largest banks have been doing splendidly, but a number of regionals are facing mounting levels of nonperforming assets, and their stocks are being hurt. Unlike the biggest banks, which have become more like investment than commercial banks, the regionals are longtime lenders to business.

At $41 billion-asset Regions Financial Corp. of Birmingham, Ala., for example, nonperforming assets rose 16% year-over-year, to $185 million, in the third quarter.

Regions warned analysts in September that its earnings would fail to hit consensus projections reported by Thomson First Call Corp. Before the announcement, the consensus was 65 cents per share, but it fell to 62 cents after the warning. Investors were jolted further when Regions reported Monday that its earnings were only 59 cents.

Investors and analysts say the Regions case reflects a trend in which banks increasingly are unaware of how much trouble they are in.

"We are finding that the event is usually worse than the company originally believed," said David Trone, an analyst for Credit Suisse First Boston in New York.

As Mr. Trone indicated, and as federal regulators have warned, Regions' problems are part of a growing list of large loans going bad.

Detroit's $37 billion-asset Comerica reported a 48% rise in nonperforming assets, to $158 million.

Nonperforming assets rose 47% at $43.4 billion-asset Amsouth Bancorp. of Birmingham, Ala., to $123.5 million. At $8.9 billion-asset Centura Banks Inc. of Rocky Mount, N.C., nonperforming assets increased 10.6%, to $41.5 million.

CCB Financial Corp. of Durham, N.C., which has $18 billion of assets, reported a 9% increase in nonperforming assets, to $17.5 million.

Summit Bancorp of Princeton, N.J., which has $34 billion of assets, wrote off a $60 million credit for bankrupt SkyView Media.

Hibernia Corp. of New Orleans, a $15 billion-asset company, wrote off a $33 million loan in the third quarter.

"We are seeing some cracks in asset quality," said David Stumpf, an analyst for A.G. Edwards in St. Louis. "When we come out of this quarter, credit quality will be a lingering issue."

As a result, these stocks have been punished by investors. Regions' stock, for example, closed down 3.8% on Tuesday, at $27.0625. It is down 32% since Sept. 1.

"Most of the easy sources of earnings growth no longer are available," Mr. Stumpf said. "You couple that with competition for loans and thinning margins, and suddenly next quarter's earnings are not a certainty anymore."

On the whole, bank stocks skyrocketed on Tuesday after a government report showed that the consumer price index rose 0.3% in September. The report indicates that inflation continues to be subdued, easing pressure on the Federal Reserve to raise interest rates. In response, the American Banker index of the 50 largest U.S. banks rose 3.2%, and the American Banker 225 rose 3.1%. Together with a sharp rise on Monday, the AB50 has risen 6% in two days, and the AB225 has climbed 5%.

Though valuations look cheap to some, stock prices might have more to fall with the specter of eroding credit quality, said Mr. Stumpf. "As long as nonperforming assets is a lingering issue -- and creates doubts -- it is going to be hard for valuations to improve in that environment."

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