(Includes Wells Fargo, US Bancorp, KeyCorp and SunTrust results.)

Regional banks that have already reported second-quarter results are showing continued strains in their loan portfolios, as the commercial sector sags in the recession.

Large money center banks and brokerage firms were able to somewhat offset weak credit metrics during the quarter, thanks to their investment banking arms. Goldman Sachs ( GS), Bank of America ( BAC) and JPMorgan Chase ( JPM) posted impressive trading results and racked up fees revenue as troubled companies looked to recapitalize their balance sheets.

BofA, JPMorgan Chase, BB&T ( BBT)and others also benefited from the mortgage refinancing boom earlier in the quarter. Citigroup ( C) had a huge one-time gain from the completion of the Smith Barney- Morgan Stanley ( MS) joint venture, sending its quarterly numbers into the black.

But regional banks are tied much more closely to the health of the economy. They depend much more on making money on the spread between the interest rates they offer depositors and the amount at which they lend money to businesses and consumers. This can be particularly stressful as borrowers don't pay their loans back, measured by nonperforming assets, and weak demand for lending as a result of an anemic economy.

On Wednesday, US Bancorp ( USB), SunTrust Banks ( STI) and KeyCorp ( KEY) were the latest regional banks to report rising nonperforming assets and continued stress in their loan portfolios. Wells Fargo ( WFC), which has become more of a national bank with its acquisition of Wachovia last year, also reported results.

Both SunTrust and Key posted earnings losses for the second quarter. US Bancorp reported substantially lower profit due to higher credit costs. Wells Fargo's loan book also had investors concerned.

Alongside troubles in their residential mortgage, home equity and consumer loan portfolios, these banks are also showing continued stress in residential and commercial development loans, as well as commercial real estate loans. Typically, smaller banks have greater exposure to commercial loans, as the business is much more localized and "relationship-based."

Residential Construction Exposure at
Select Regional Bank Holding Cos. vs. U.S. Aggregate*
Company Name 1-4 Family Construction Loans ($billions) Total Assets ($billions) Residential Construction/ Total Assets
BB&T Corp. 4.56 143.42 3.18%
First Horizon National 0.92 31.21 2.96%
Regions Financial 3.77 141.95 2.65%
SunTrust Banks 4.56 179.22 2.55%
Marshall & Ilsley 1.56 61.91 2.53%
Zions Bancorp 1.35 54.60 2.47%
Huntington Bancshares 0.97 51.73 1.88%
Comerica 1.03 67.76 1.52%
PNC Financial Services Group 3.73 286.47 1.30%
M&T Bank 0.70 64.88 1.09%
Fifth Third Bancorp 1.13 119.31 0.95%
KeyCorp 0.73 98.37 0.75%
U.S. Bancorp 1.20 263.62 0.46%
Aggregate U.S. Commercial and Savings Banks 135.01 12,312.78 1.10%
*All data as of March 31
Source: SNL Financial

Similar themes ran through the earnings reports of BB&T, First Horizon ( FHN), M&T Bank ( MTB), Regions Financial ( RF) and Comerica ( CMA), which have also reported earnings since Friday.

The credit woes do not bode well for other banks set to report this week, including Fifth Third ( FITB), Huntington Bancshares ( HBAN) and PNC Financial Services ( PNC). Some of these companies are expected to report dramatically lower earnings -- if not losses -- this quarter.

"The very weak performance of the traditional banking business was clearly demonstrated" by the sizable losses reported by First Horizon and M&I on Friday, Rochdale Securities analyst Richard Bove wrote in a note at the end of last week. "These results suggest that when the bulk of the regional banks report their earnings in the coming week, at least 50% will report losses," he wrote.

Regional bank shares were mixed on Wednesday. The Keefe Bruyette & Woods Regional Bank Index was up 1.8% to 36.71.

Morningstar analyst Jim Sinegal says that since two of the better known banking names -- M&T and BB&T -- posted profits "at a much lower pace than in the past ... I think you can extrapolate from that and assume that earnings for the most part are going to be pretty bad."

"Commercial losses are still on the upswing," Sinegal says. "There's a lot of bad underwriting in commercial real estate. We've seen a lot of resident losses and consumer losses," as unemployment rises. "And now we're going to see the commercial losses building," he says.

Commercial Real Estate Exposure at
Select Regional Bank Holding Cos. vs. U.S. Aggregate*
Company Name Commerical Real Estate and Construction Loans ($Billions) Total Assets ($Billions) Commercial Real Estate & Construction/ Total Assets
Zions Bancorp 21.02 54.60 38.50%
Marshall & Ilsley 15.46 61.91 24.96%
M&T Bank 16.14 64.88 24.88%
Comerica 14.86 67.76 21.93%
Huntington Bancshares 10.95 51.73 21.17%
BB&T Corp. 30.15 143.42 21.02%
Regions Financial 27.80 141.95 19.58%
KeyCorp 16.26 98.37 16.53%
Fifth Third Bancorp 18.43 119.31 15.45%
First Horizon National 3.86 31.21 12.36%
SunTrust Banks 19.82 179.22 11.06%
U.S. Bancorp 28.87 263.62 10.95%
PNC Financial Services Group 30.03 286.47 10.48%
Aggregate U.S. Commercial and Savings Banks 1,397.85 12,312.78 11.35%
*All data as of March 31
Source: SNL Financial

Regions on Tuesday reported a wider-than-expected second-quarter loss fueled by bleeding in its residential homebuilder loan portfolio and other commercial and consumer loans. The Birmingham, Ala.-based bank, which was one of the 19 banks that underwent the government stress tests, was told to raise $2.5 billion in capital in May by the Federal Reserve.

Also on Tuesday, Comerica posted its second consecutive net loss applicable to shareholders of $16 million, or 10 cents a share, as the Dallas-based company said that credit metrics worsened on souring residential real estate development loans.

"The second quarter results reflect the difficult economic environment, particularly the residential real estate development challenges," Chairman and CEO Ralph Babb Jr. said. "We are managing through this environment by quickly identifying problem loans, building our loan loss reserve credit-by-credit, and strengthening our already solid capital position. While there are some signs the economy may be bottoming, businesses and individuals are still feeling the effects of this prolonged recession. They remain cautious in an environment in which unemployment rates have continued to rise."

Comerica specifically cited increases in problem loans in its leasing and middle market banking sectors in the Midwest, as well as residential real estate development loans, particularly in Florida.

Babb added that the company is continuing to see "weak loan demand" across its geographic markets as the economy continues to suffer.

The continued pressure on earnings from credit woes makes a case that it will be unlikely that we see any further regional banks returning government bailout funds in the near future. BB&T and US Bancorp are the only two large regional banks that have repurchased preferred stakes the government bought through the Troubled Asset Relief Program.

On a positive note, several large banks said last week that the rate of growth of early delinquencies was starting to abate, suggesting that a downturn could be peaking. Market participants say that commercial loan losses are usually the third and final leg of a downward credit cycle.

Still Alan Villalon, a senior banking analyst at US Bancorp subsidiary First American Funds, cautions that it is still unknown just how severe the third leg could get.

"If there are more legs," he says, "then that's the perfect storm that's not being discounted yet."

If you liked this article you might like

One Trade You Need to Make Monday

One Trade You Need to Make Monday

President Trump's Trade War Begins

President Trump's Trade War Begins

Bonus White Paper: How to Play a Resurgent Banking Sector
Your February Paycheck Could See a Little Bump, Thanks to the New Tax Bill

Your February Paycheck Could See a Little Bump, Thanks to the New Tax Bill

8 Great Financial Stocks for 2018

8 Great Financial Stocks for 2018