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%. 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%.
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%.