Mortgages Weigh on Regional Banks

Updated from 12:53 p.m. EST

Large regional banks across the U.S. plunged on Thursday after reporting earnings hit by the ever-expanding mortgage and credit market deterioration.

The KBW Bank Index, which tracks the largest banking companies, dropped 3.9% to 79.53, while the KBW Regional Banking Index fell 3.1% to 66.80.

"Most of our clients are sitting on the sidelines waiting for these [earnings] numbers to come out and then reacting accordingly," says Matt Shields, a senior trader at FIG Partners in Atlanta, which focuses on regional bank stocks. "Nonperforming assets continue to rise and credit issues continue to be at the forefront of our clients' eyes. The construction loans are certainly the riskiest ... New construction has seen a massive halt [and there are] plenty of houses on the market."

Stocks also were taking a beating due to Federal Reserve Chairman Ben Bernanke's grim assessment of the economy in Capitol Hill testimony.

Consumer mortgage losses aside, many banks are also reaping losses from problem loans made to residential homebuilders and developers -- yet another sign that the housing decline is spreading past just subprime borrowers.

PNC Financial Services

PNC Financial Services(PNC), one of the more conservative consumer lenders of the bunch, posted a 53% drop in profit, related to previously announced charges taken as a result of credit problems on loans made to homebuilders.

In the final three months of the year, the Pittsburgh-based bank reported profit of $178 million, or 52 cents a share, compared to $376 million, or $1.27 a share, in the fourth quarter of 2006. PNC's revenue of $1.63 billion rose just 6% from a year earlier, but fell 7% from the third quarter to $1.63 billion.

"PNC had a good year in 2007, given the operating environment," said Chairman and CEO Jim Rohr. "However our fourth quarter performance did not meet our expectations due to challenges that included unprecedented market volatility and credit deterioration in our residential real estate development portfolio."

PNC, on an adjusted basis, earned $365 million, or $1.07 a share, down 7% from a year earlier. Analysts expected the bank would make $1.07 a share. Results exclude a charge related to the settlement by Visa and member banks with American Express(AXP), which claimed they were conspiring to keep it out of the bank-issued credit card business, as well as certain issues related to its BlackRock(BLK) investment.

PNC warned last month of $26 million of writedowns on about $1.5 billion worth of commercial mortgage loans held for sale, lower trading results, an increase to the provision due to credit losses related to residential real estate development -- primarily loans in Maryland and Northern Virginia -- as well as certain expenses related to its stake in BlackRock.

The bank said that its total exposure to residential real estate is approximately $2.1 billion.

PNC had to set aside an additional $188 million in the fourth quarter, more than four times its provision for the year-earlier period, partially from the residential real estate exposure, but also from "growth in total credit exposure," the company said. In the past year, PNC has completed several bank acquisitions including Mercantile BankShares of Baltimore and Yardville National Bank of New Jersey.

"Charged-off" loans totaled $83 million, or 0.49% of its average loan balance, the company said. Shares were losing 5.2% to $57.80 Thursday afternoon.

Huntington Bancshares

Huntington Bancshares(HBAN) posted a net loss of $239 million, or 65 cents a share, mostly related to its exposure to one subprime lender commercial customer, but also warned of increasing weakness in the Michigan and Ohio commercial real estate markets. That compares to a profit of $87.7 million, or 37 cents a share, in the year-earlier period.