NEW YORK ( TheStreet) -- Third-quarter earnings for large regional banks points undeniably to their biggest risk and their best hope for profits - loans.

Peter Sorrentino, senior portfolio manager at Huntington Funds, a unit of Huntington Bancshares ( HBAN - Get Report), says that investors are mainly concerned with regional banks' ability to competitively price loans.

"If you're loan pricing was good and net interest margin was good, investors are saying that's the kind of bank we want to own," he says. "If you had loan pricing power, the Street loves you."

For many regional banks, the numbers don't lie.

U.S. Bancorp's ( USB - Get Report) net interest margin - the difference a bank makes on lending vs. paying customers for deposits - rose 1 basis point to 3.91 from the second quarter and 24 basis points from the year-earlier.

U.S. Bancorp said "even though loan demand had not picked up dramatically, their net interest margin was improving, which means they got pricing power," Sorrentino notes. "That's going to be a key to who will be a winner -- a company that can lend and lend profitably."

It also means that customers are sticking with strong banks and not defecting because of an increase in loan pricing, Sorrentino adds.

"That's a powerful metric," he says.

Fifth Third Bancorp ( FITB - Get Report) also saw improvement on its net interest margin. For the three months ending in September, the Cincinnati-based bank's margin rose 13 basis points and 27 basis points, respectively.

Credit has clearly turned a corner, generally speaking, as the banks experienced improvements in nonperforming loans and provisioning in the third quarter.

But investors are already past that.

The story for the banks is beyond the fourth quarter - the so-called kitchen sink quarter and a period in which banks take the opportunity to clean off their books as they get ready for the new year. Rather, investors are wary of 2011.

They want to see loan growth, repayments to the U.S. government's Trouble Asset Relief Program and dividend returns that lead to overall profitability so banks can put the financial crisis behind them. And if institutions can't get there, well, there is always the option to sell.

Challenges remain for the banks, particularly regional banks that are geographically concentrated to communities exposed to the economic downturn. Credit may be on a positive trajectory, but continued low interest rates, weak loan demand from commercial borrowers and new financial reform measures under the new Dodd-Frank law, gives the banks much to overcome next year.

"There definitely is downward bias toward 2011 earnings," says Michael Rose, vice president of equity research at Raymond James & Associates.

"That primarily because the increase in interest rates is going to be pushed out to 2012 -- analysts are baking that into forecasts -- and margins and the environment for organic loan growth opportunity remains slow at best," Rose says. "The numbers are somewhat less important as opposed to the guidance" by management.

Banks like Comerica ( CMA - Get Report), Marshall & Ilsley ( M&I) and Zions ( ZION - Get Report) are under pressure.

Comerica reported earnings of 33 cents a share, missing analysts' estimates by 7 cents.

The loss was "primarily driven by much lower-than-expected net interest income, which was attributable to greater-than-expected margin and earning asset contraction," Christopher Mutascio, an analyst at Stifel Nicolaus, said in a note to clients. "Despite a continued improvement in credit quality, results reflect the impact of weak economic conditions, and a low-rate environment on the company's commercial-weighted balance sheet."

M&I reported a quarterly loss of $169 million, or 32 cents a share, worse than Wall Street predicted.

"M&I's efforts to address a large problem hospitality credit in third quarter appeared to mask its generally improving asset quality trends," Barclays Capital analyst Jason Goldberg writes in a note about the Milwaukee-based bank.

"This action caused both provision and NCOs to exceed our forecast, but underlying credit trends continued to improve, as evidenced by its fifth straight quarter of non-accrual loan declines. Still, the market's attention is increasingly shifting away from asset quality improvements and toward revenue growth and profitability potential," Goldberg writes.

Todd Hagerman an analyst at Collins Stewart, reiterated his neutral rating on Zions, which reported a loss of $80.5 million, or 47 cents a share. While the Salt Lake City-based bank showed improvement in its asset quality and pre-provision profits improved, "the lumpy revenue stream and elevated expense level gave us pause," Hagerman wrote in a note to clients this week.

"We remain cautious on the company's profitability, particularly the weak loan demand, persistent margin pressure, and stubbornly high credit-related costs," Hagerman wrote. "While the company will likely return to sustained profitability in 2011, earnings expectations and tangible book value already appear to capture a fair amount of reserve release and credit improvement."

Not all is lost at the regional banks.

Banks generally experienced positive pick up from mortgage originations in the quarter and some banks including PNC Financial Services ( PNC - Get Report) as well as First Horizon National ( FHN - Get Report) are seeing positive signs for commercial borrowing.

"We're not seeing a lot of growth, but the interesting thing is we're seeing a lot more activity in the M&A space and capital markets space, where our customers are becoming a lot more active than they were a year ago," according to PNC's Chairman and CEO James Rohr, during the bank's earnings call early Thursday. "That's a good sign as it portends to loan growth in the future."

--Written by Laurie Kulikowski in New York.

To contact the writer of this article, click here: Laurie Kulikowski.

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