Earnings reports proved to be one worse than the other at several mid-size regional banks Tuesday, as the credit crisis took a big bite out of their businesses in the fourth quarter.

Banks overall have posted a litany of disappointing results as credit expenses soared. Souring home equity and residential real estates loans as well as the inability to move riskier loans typically sold in the seized secondary market are among the primary factors contributing to the problem.

Banks are also furiously ramping up their loan-loss reserve levels, in some cases doubling and tripling their provisions for the quarter, in order to protect themselves from worsening credit conditions this year. Still others with capital markets exposure reported large writedowns on asset-backed securities and collateralized debt obligations, which have fallen sharply in value.

Despite the poor earnings results posted by three Midwestern banking companies and three southern lenders, including Bank of America ( BAC) and Wachovia ( WB), bank stocks rallied on Tuesday from the Federal Reserve's decision to make an emergency rate cut on Tuesday. The Fed cut the fed funds rate by 75 basis points to 3.50%.

National City

Cleveland-based National City ( NCC) posted a loss of $333 million, or 53 cents a share, slightly more than double what Wall Street analysts expected the company to lose in the quarter. That compared to a profit of $842 million, or $1.36 a share, in the year-earlier quarter.

The bank said the loss resulted from a large provision for credit losses, losses on mortgage loans held for sale, severance charges related to employee reductions during the quarter and charges related to litigation settled between American Express ( AXP) and Visa and several member banks over allegations that they blocked American Express from entering the bank-issued credit card business. It also took a $181 million charge related to goodwill of its mortgage business.

National City has been downsizing its mortgage business as the housing decline worsens. Earlier this month the bank shut down its entire wholesale mortgage business, but said it would continue to originate mortgage loans directly to consumers. The move will eliminate about 900 positions, bringing National City's tally of workforce reductions to about 3,400 employees as a result of the tough mortgage and banking environment.

For the full year, National City reported profit of $314 million, or 51 cents a share, compared to $2.3 billion, or $3.72 a share. The 2006 results include a $622 million after-tax gain related to the sale of its subprime lender First Franklin to Merrill Lynch ( MER).

"The poor financial performance of mortgage-related businesses along with related restructuring costs and other unusual charges, overshadowed solid fundamental results in banking and wealth management," CEO Peter Raskind said. "We believe that the restructuring actions we've taken in recent months to reduce costs, and to lower credit and capital markets risk in the mortgage business, while negative to earnings and costly to shareholders in the short run, have put the company in position to deliver better results going forward."

National City, along with many other banks that were hurt by the credit crisis, is also looking to boost its capital levels this year. The bank has already slashed its dividend nearly in half and said that it plans to raise capital this quarter through the issuance of new securities.

The troubled bank set aside $691 million for credit losses in the fourth quarter -- nearly double what it set aside in the third quarter -- bringing its total provision for the year to $1.3 billion. The provision "primarily reflects higher credit losses on liquidating portfolios of nonconforming mortgage and out-of-footprint home equity loans," among other mortgages, it said. Net loans charged off totaled $275 million in the fourth quarter.

National City shares were recently adding 7.2%.


KeyCorp ( KEY) reported a plummeting fourth-quarter profit from continuing-operations of $22 million, or 6 cents a share, before the effects of an accounting change. A year earlier, the bank had made $311 million, or 76 cents a share.

Key's net income for the quarter was $25 million, or 6 cents a share, compared to $146 million, or 36 cents a share a year earlier. The bank's discontinued operations include the subprime mortgage loan portfolio held by the Champion Mortgage finance business the bank sold in November 2006. Key completed the sale of Champion's origination platform in February 2007.

The Cleveland bank took a $363 million loan-loss provision, which compares to sums of $69 million in the prior quarter and $53 million a year earlier. Actual charge-offs roughly doubled from the third quarter to $119 million -- at the high end of the range it had projected last month -- or 0.67% of average loans. Also as expected, nonperforming assets vaulted 34% sequentially to $764 million. That comes to 1.08% of portfolio loans, other owned real estate and other nonperforming assets.

But the bank had also forecasted in December that these symptoms of the crumbling housing market, along with expenses from the Visa settlement, would drag its bottom line to a loss of up to a nickel a share. Analysts, on average, were expecting a loss of 3 cents a share.

In October, the bank had pegged earnings at a far more optimistic range of 68 cents to 74 cents a share.

Key shares were recently soaring 12%.

Fifth Third

The final quarter of the year was little better at Fifth Third ( FITB). The Cincinnati-based bank made just $38 million, or 7 cents a share, down 88% from the third quarter and 42% from results a year earlier.

The bank's results included several other previously announced charges, including: $94 million, or 12 cents a share, for expenses due to the Visa settlement; a $155 million non-cash charge, or 29 cents a share, intended to lower the cash surrender values of certain bank-owned life insurance policies; and $8 million, or a penny per share, in acquisition costs.

Fifth Third took a $284 million provision in the quarter, slightly higher than the bank had anticipated last month and more than double its provision in the third quarter.

For the year, the bank made $1.1 billion, or $2.03 a share, down from the $1.2 billion, or $2.13 a share a year earlier.

"Obviously this has been a difficult quarter for the banking industry," said President and CEO Kevin Kabat. "Like others, we saw a fairly marked turn in credit performance during the quarter. And, while we have not had any significant market-related losses on structured securities, loans, or funds we manage for others, one of our BOLI insurance policies was invested in assets that experienced significant market declines due to widening credit spreads, which negatively impacted our reported results.

The credit environment "remains challenging and we expect credit conditions and the performance of our loan portfolio to continue to deteriorate in the near term," Kabat added. "We have been actively working over the past year to take steps to address our areas of concern. These areas include home equity loans and more generally, real estate loans, particularly in the upper Midwest and Florida."

Fifth Third's stock recently was climbing 2.6%.

Regions Financial

Things were not much better in the South, where Regions Financial ( RF), saw fourth-quarter adjusted income fall 61.8% year over year to $164.6 million, or 24 cents a share. Wall Street was looking for 28 cents a share.

The bank's loan-loss provision came to $358 million, or 1.45% of total loans. That's a hair lower than Regions had estimated in a warning earlier this month, but it still nearly quadruples from the amount it had set aside in the third quarter to cover soured loans. Regions' loans to residential homebuilders constitute some 8% of its total $95.4 billion portfolio.

The adjusted earnings figure includes the bank's share of the Visa settlement, a $51.5 million expense. Excluded are one-time costs from a fourth-quarter rebranding, as well as from integrating the operational systems of Regions and AmSouth Bancorp following the banks' November 2006 merger. Leaving those items in the mix, Regions' profit came to $70.6 million, or a dime a share.

Shares of Regions were recently up 4.1%.

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