Wall Street's impressive recovery has spread even to weak Main Street regional banks.

Ohio-based Fifth Third Bancorp (FITB), until recently swamped by loan losses, on Thursday joined stronger rivals PNC Financial Services Group Inc. (PNC) and BB&T Corp. (BBT) in posting the latest round of strong regional bank earnings. The reports from all three banks include still further evidence that borrowers of all types--whether consumers or companies--are increasingly able to re-pay their debts, helped in large part by an improving economy.

Wall Street banks like Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM) suffered their worst losses at the outset of the financial crisis, which began in earnest two years ago. They held billions in mortgages and mark-to-market investments, which were among the first assets to show damage from the credit crisis.

Regional banks, by contrast, typically specialize in loans to companies, which often show signs of losses on a much more delayed basis than consumer loans and securities. Observers had worried that regional lenders would face years of losses related to those loans, but growing evidence suggests an improving economy will cushion those losses.

Fifth Third posted a first quarter net loss of $10 million, after earning $50 million a year ago, but the condition of its loan portfolios improved sharply. During the credit boom, Fifth Third issued billions in now-failing loans tied to commercial real estate, but the bank's recovering from those bad bets faster than many investors expected.

PNC and BB&T, by contrast, have used their healthier balance sheets to purchase big troubled rivals during the crisis. Easing loan problems helped their profits, too, and both banks are beginning to show the growth opportunities that resulted from their buying weaker competitors. PNC earned $671 million, up 26.6% over last year's first quarter. BB&T earned $194 million, down 39% over last year, with most of the decline tied to lower securities gains.

Fifth Third's shares were recently down 2.6% to $14.75, in part from investors taking profits. In the past 12 months, its shares have roughly tripled. Stock in PNC was recently up 4.2% to $68.05, while BB&T's stock was down 3.8% to $33.80.

Fifth Third's results follow Wednesday's reports from fellow struggling regional lenders KeyCorp (KEY), SunTrust Banks Inc. (STI) and Huntington Bancshares Inc. (HBAN), which all impressed investors by showing their troubles with bad loans are easing.

The ongoing rally in regional bank stocks could soon prove a conundrum for investors as they try and estimate how much further the once-distressed shares could rise. Huntington's stock has nearly doubled so far this year, while KeyCorp's shares are up more than 60% and Fifth Third's are up 50%. All three lenders are based in Ohio, which was hit hard by the post-crisis recession.

"The sector has been on fire all year," said Jeff Davis, managing director at Guggenheim Partners. "We're due for some profit-taking."

In fact, analysts have been downgrading some regional bank shares because they see few reasons to justify further rallies.

Gerard Cassidy, analyst at RBC Capital Markets, wrote to clients about KeyCorp's shares: "We believe the stock now fully reflects the recent improvement in credit as well as the expected recovery." He assigns a $9 price target to Key's stock. "There is limited upside to the stock price at the current valuation."

KeyCorp's shares were recently up 1.5% to $9.07. Huntington was recently up 5.5% to $6.95 and SunTrust stock was recently down 2.4% to $29.02.

-By Marshall Eckblad, Dow Jones Newswires; 212-416-2156; marshall.eckblad@dowjones.com
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