Regional Banks Feel Credit's Pinch
A slew of regional bank earnings, released Tuesday morning, provide a quick look at how the nation's credit crunch is affecting banks other than the national, commercial giants. For Cleveland-based National City Corp. (NCC), the ghost of former subprime lending platform First Franklin -- and now, a slew of other loans, too -- has continued to hurt, as the bank reported a third quarter net loss of $729 million and continued to build its loss reserves. The quarterly loss compares to a $1.8 billion loss in Q2 and a loss of $19 million in the year-ago period. "Not surprisingly, the larger macro-economic environment affected credit quality in our portfolios during the quarter," said CEO Peter Raskind. The bank boosted loss reserves by $318 million during the quarter, and by $2.0 billion year-to-date, although loan loss provisions declined by $408 million between Q2 and Q3. It was able to pull of the feat by keep net charge-offs for non-performing loans essentially flat. "We continue to actively manage down our risk exposure and aggressively pursue loss mitigation strategies," Raskind said in a press statement. $21 billion of National City's loan portfolio -- 8 percent of total loans -- has been carved out as an "exit portfolio," essentially placed into managed run-off, and consists of broker-originated home equity loans, nonprime mortgages, non-agency mortgages, residential construction loans, and automobile, marine and recreational vehicle loans originated through dealers. The exit portfolio drove 40 percent of the bank's quarterly charge-offs, said executive vice president James LeKachman. Shares in National City were at 43.06, up nearly 5 percent, when this story was published, as many financial stocks rallied on news that the Federal Reserve was taking new steps to finance the purchase of assets from money market funds. KeyCorp, Fifth Third also in the red Fellow Cleveland banking competitor KeyCorp (KEY), once considered a bidder for National City, also announced a quarter loss Tuesday morning. The bank said it lost $36 million, or $0.10/share, compared net income of $224 million, or $0.57/share, one year earlier. “We have experienced the most severe financial crisis any of us has known in our business lifetime,” said CEO Henry L. Meyer, III, in a press statement. KeyCorp's Q3 results reflected a $133 million increase in reserves to $1.6 billion, or just over two percent of total loans. Additionally, third quarter results were adversely impacted by $33 million of after-tax losses on derivative contracts that resulted from market disruption caused by the failure of Lehman Brothers Holdings Inc. The bank saw the pace of charge-offs slow to $273 million, relative to the $524 million booked one quarter earlier; despite the slowing pace of charge-offs, non-performing loans rose 18.7 percent quarter-over-quarter, totaling $967 million at the end of the third quarter. Allowance for loan losses dropped to 160.7 percent of non-performing loans, from the 174.5 percent in Q2; but despite the drop the percentage remains healthy relative to peers (some banks have seen coverage levels fall well below 100 percent). Shares in KeyCorp were at $11.20, up nearly 15 percent, when this story was published. Joining the Ohio-based regionals in the red zone Tuesday was Cincinnati-based Fifth Third Bancorp (FITB), which said it lost $56 million during the third quarter -- the loss was narrower than the $202 million quarterly loss posted in the second quarter, however. “The banking industry has experienced unprecedented developments in recent weeks,” said Kevin Kabat, chairman, president and CEO, in a press statement. Fifth Third reported that third quarter originations were just $2.0 billion, down sharply from the $3.3 billion recorded during the previous quarter; the company cited "market disruptions and interest rates that were generally higher during the quarter" as the driver for the drop in originations. The bank also took a $51 million loss on its $69 million in par value of preferred shares in Fannie Mae (FNM) and Freddie Mac (FRE), it said. Charge-offs at Fifth Third rose 35 percent quarter-over-quarter, to 463 million -- with most of the rise coming in the bank's portfolio of commercial mortgages and commercial construction loans, although charge-offs on residential mortgage loans rose as well. "Loss experience continues to be primarily associated with consumer residential real estate loans and commercial residential builder and developer loans, and to be disproportionately concentrated in Michigan and Florida," the bank said in its earnings release. "These states represented approximately 65 percent of total third quarter net charge-offs." Shares in Fifth Third were at $12.49, up 2.13 percent, when this story was published. Of course, not all regional banks are bleeding this quarter. US Bancorp (USB) reported income of $576 million for Q3, while M&T Bank Corp. (MTB) posted $91 million in income. Regions Financial Corp. (RF) also posted income of $79.5 million for the quarter Tuesday morning. Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.