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Tickers in this Article: USB, RF, MTB, KEY, BRK.A
In that truly timeless piece of American cinematic feel-good yarn spinning, "It's a Wonderful Life", depressed small town banker, George Bailey, played by Jimmy Stewart, contemplates suicide after he's refused an injection of emergency funds to save his struggling savings and loan - a business he's built primarily on providing mortgages to the working poor.

Fortunately for George, help arrives in the form of Clarence, a guardian angel sent from above to show George what life would be like in his town without him, and a last minute donation of funds collected by family and friends saves his S&L.

Credit Crisis Now Hitting the Heartland
If the circumstances presented in this Depression Era morality tale appear to be unsettlingly familiar, then you've probably had a chance to look over the earnings results recently released by some of the nation's largest regional banks. Judging by the numbers, it now looks like the financial crisis spawned by Wall Street has spread into America's Heartland. (With what is going on in the markets don't miss The Crash Of 1929 - Could It Happen Again?)

Earnings Take A Nose Dive As Credit Quality Sours
Earlier this week, some of the country's larger regional lenders like U.S. Bancorp (NYSE:USB), Regions Financial (NYSE:RF), M&T Bank Corp (NYSE:MTB) and KeyCorp (NYSE:KEY) collectively disappointed analysts and investors alike with a slew of dismal earnings results and data points that showed a serious deterioration in the credit quality of their lending books.

For USB, Q3 net income dropped to $576 million, or 32 cents a share, from $1.1 billion, or 62 cents a share, a year earlier, as the bank upped its loss provision to $748 million from $199 million a year earlier. Nonperforming assets more than doubled to $1.49 billion. For southern banker Regions Financial, net income in the current quarter fell by 80% to 11 cents per share as its charge-offs rate (a measure of loan defaults) soared to 1.68% from 0.27% a year earlier. Management also disclosed that the bank intends to participate in the Treasury's $250 billion bailout plan.

Things were no less gloomy for Cleveland-based KeyCorp, which saw its earnings per share dip in the third quarter to 10 cents per share from 57 cents per share a year earlier, and net charge-offs quadrupled to $273 million. Rising losses from residential real estate prompted a 54% drop in profits for mid-Atlantic operator M&T Bank Corp as it, too, saw its net charge offs rise sharply to $94 million from $22 million. Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) counts itself among M&T larger investors.

Underwater Mortgages Could Compound the Problem
Unlike on Wall Street, this hometown version of the credit crunch isn't a result of wildly complex "financial hydrogen bomb" derivative contracts going toxic on balance sheets. As big and bad as those are, they tend to be one-offs. For the regionals, the scale of the problem may even be bigger as they now face the prospect of dealing with a protracted cascade of foreclosures resulting from the deepening housing crisis. Right now, about one-in-six U.S. homeowners is "underwater" - meaning they owe more on their mortgages than their houses are worth. If this key thread of the fabric of American society continues to unravel, the results reported to date by the regional banks will be tame relative to what the future might hold. (To learn more, read Saving Your Home From Foreclosure.)

The Final Word
While I don't expect any of today's hard-pressed hometown bankers to try to replicate George Bailey's Christmas Eve moment of doubt perched on top of a snow-covered bridge, I nevertheless expect many will be reaching out for help from a more tangible guardian angel in the form of the U.S. Treasury as they try to ensure that today's tale of financial woe has a happy ending.

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