Regional banks stand to weather the turmoil

Some Ohio banks are seeing an increase in deposits.

CINCINNATI (AP) — Some of Ohio’s regional and community banks may have an edge over industry giants as the banking sector struggles to cope with the financial meltdown that resulted in the federal government’s $700 billion rescue plan, some experts say.

Those advantages may lead consumers to turn to from bigger to smaller banks, according to business analysts. Even though the stock of Ohio banks such as National City Corp. and Fifth Third Bankcorp has been pounded by the financial crisis, analysts say some regional banks already are seeing increasing deposits from customers pulling money out of the skidding stock market or worried about larger banks like Wachovia being bought.

In better times, depositors might be drawn to larger, well-known banks such as Wells Fargo or Citigroup, but that reputation factor has reversed some, said Michael Pagano, a finance professor at Villanova University School of Business.

“If I’m in Columbus, Ohio, and I see a bank that has been there for decades, maybe it’s time to trust that bank more than the big guys,” he said.

Ohio regional banks are important to the state’s economy — providing capital for small- and medium-sizedbusinesses to operate and loans for farmers and homeowners. Shares in Ohio’s Columbus-based Huntington Bancshares Inc., Cincinnati-based Fifth Third and Cleveland-based National City — rose after Congress approved the rescue plan, but they haven’t escaped concerns over the financial fallout.

National City shares plummeted Monday as the market tumbled and after its ratings were cut by Fitch Ratings. Fitch said National City could face more losses on mortgage and home equity portfolios in the weakening economy.

Some analysts have been concerned by Huntington’s exposure to Franklin Credit Management Corp. — a mortgage servicer tied to Sky Financial Group, which Huntington acquired last year.

Robert W. Baird & Co. last month downgraded shares of Fifth Third to “neutral” amid concern that the weak economic environment may make it difficult to sell off assets as planned.

One plus for regional banks is that they rely primarily on stable deposits for funding, said Scott Valentin, an analyst with FBR Capital Markets Corp. He said big banks such as Citigroup depend more on capital market-based funding that is either very expensive or not available now.

“Most regional banks tend to have pretty straightforward balance sheets,” said Valentin. “They make loans and take deposits.”

The big banks are more complex, involved in capital-market activities, acting as broker-dealers and having more international exposure.

“Right now, in a market where everyone’s nervous and there’s no risk appetite, many want to avoid complex business models,” Valentin said.

Many regionals also weren’t as involved in the ill-fated acquisitions during the 2002-2006 heyday of real estate growth and the corresponding increase in subprime lending that left larger banks in trouble, according to Pagano.

One of the biggest problems for Wachovia — one of the nation’s largest banks — was its 2006 acquisition of California-based Golden West Financial Corp., Pagano said. He said Wachovia ended up with option ARM mortgages, shaky loans and bad credit when everything came crashing down.

An option ARM is an adjustable-rate mortgage allowing borrowers to choose among several payment options. Some borrowers chose low payments that didn’t cover the interest, which was then added to the principal, Pagano said.

One disadvantage for some regionals is that they are less geographically diversified than big banks.