Fragile Regional Banks Turn to Investors in Bid to Raise Capital

Beaten down regional banks badly need capital, and they think know where to find it: the public market.

Zions, a $53 billion-asset banking company based in Utah, on Thursday affirmed its plan to raise $250 million in a secondary stock offering. Another large regional player, Synovus, earlier this week announced it would seek to raise up $350 million in a stock offering, part of a broader plan by the Georgia company to add $500 million in capital. Also this month, Ohio's Huntington Bancshares said it plans a stock offering expected to raise up to $150 million.

Many midsize banks -- those with $1 billion to $100 billion in assets -- need capital to offset rising losses on residential mortgage and, increasingly, commercial real estate loans. The Federal Reserve is worried enough about the latter that it's stepping up its scrutiny of regional banks. The Congressional Oversight Panel, which is monitoring the federal government's financial reform efforts, recently projected that banks in this category may need to raise a total of $21 billion, depending on how the U.S economy performs.

Unlike JPMorgan Chase, Citigroup and the other large money-center banks that underwent government stress tests, these smaller players are less diversified, lacking investment banking, trading and other business lines to shore up sagging loan revenues.

And while the recession may be drawing to a close, many small and midsize banks will continue to struggle for the foreseeable future. Fifth-Third, a large regional banking company in Cleveland, said yesterday it expects losses stemming from bad loans to jump 24 percent. SunTrust CEO James M. Wells III also said this week he expects the company's losses on consumer, construction and residential mortgage loans to rise this year and into 2010.

"The capital shortfall for banks with less than $100 billion in assets is an order of magnitude greater than the shortfalls for the 18 stress-tested [bank holding companies]," the COP said in August (click on chart to expand). "The panel sees this as a serious issue; smaller banks may have access to a comparatively smaller pool of investors, and could face significant challenges in raising the necessary capital."

The stock offerings will test the market's confidence that regional banks can bounce back. For investors, it will also take nerve. Zions shares are down 25 percent this year amid three straight quarterly losses. The company is getting plastered on loans in its home market in the Southwest, where real estate continues to tank. Perhaps most worrisome is its exposure to losses on CRE loans, which make up roughly a third of its portfolio. Synovus, meanwhile, has high concentrations of residential construction, development and land loans in Georgia and Florida, where banks have gotten killed.

The big question for such banks amounts to this: Can they raise enough capital fast enough to make up for rising losses? And longer-term, once they turn the corner on their credit woes, how much can they grow given the more austere lending environment? At least some investors are optimistic, judging from the run-up this year in a widely followed exchange-traded fund that includes a number of midsize regional financial companies, including Zions and Huntington.